The first act of Greece's financial drama is drawing to a close, but the finger-pointing has just begun.
Setting out on what will be a long and difficult path, the Greek government announced Wednesday that it would slash its soaring deficit by €4.8-billion ($6.6-billion U.S.), or 2 per cent of economic output, by hiking taxes and cutting spending. The move should provide a small measure of breathing room to Greece, which has hovered on the brink of a full-blown debt crisis for weeks.
At the same time, governments on both sides of the Atlantic are hastening to turn up the heat on players who they believe may have contributed to the turmoil rocking Greece and indeed the entire European currency union.
At the top of their list are the banks and hedge funds that trade credit-default swaps, a type of derivative which has allowed investors to make easy bets against Greece. Next are currency traders who made big wagers against the euro.
Also under fire: credit ratings agencies, which a European official recently accused of wielding too much power over a country's financial fate.
The barrages of criticism and investigation are a reflection of official fury, particularly in Europe, at the way investors have profited as Greece foundered.
"Clearly there's an enormous amount of resentment and anger," says Amer Bisat, a partner at hedge fund Traxis Partners LP in New York and a former economist with the International Monetary Fund.
While no one denies that Greece's heavy borrowing is the source of its woes, governments are scrutinizing whether various types of trading magnified the crisis. Each day seems to bring a new probe into investor behaviour. On Wednesday, for instance, it emerged that the U.S. Justice Department was exploring whether a group of hedge funds colluded to attempt to drive down the value of the euro.
Most of the government scrutiny, however, is focused on the market for credit-default swaps. Such derivatives insure bonds against default. When the default risk rises, so too does the price of the insurance. As a result, they've become a rough proxy for investor worries about a country's - or a company's - creditworthiness.
In February, the price of Greece's CDS skyrocketed to $425,000 (U.S.) a year to insure $10-million in debt, up from under $100,000 in August of last year, according to Markit Group Ltd., a credit information firm. It has eased considerably this week, and now trades at about $313,000.
To probe the trading, the European Union has summoned regulators and participants in the CDS market to a meeting Friday in Brussels. Germany has already launched its own investigation of the market, seeking information from a U.S. clearing and settlement firm. It will also push for stricter rules on such instruments among the Group of 20 nations.
Trading in these swaps "seems to be on the radar screen in a very serious way," Mr. Bisat says, adding that the end result will almost certainly be further regulation of the market.
Some market analysts say the negative focus on CDS is misplaced, denying that such instruments exacerbated Greece's woes. The scrutiny of CDS "has more to do with governments' reluctance to face their own problems than it has basis in reality," wrote analysts at Citigroup this week in a report provocatively titled "You can't blame the mirror for your ugly face."
The pressures emanating from governments is prompting investors involved in such bets to lay low, or even cash out their wagers. Among the investors reported to have exited their positions against Greek debt are Brevan Howard, Europe's largest hedge fund, and Paulson & Co. of the U.S., renowned for its successful bet against the American housing bubble.
Government officials are turning up the temperature in other quarters too. On Tuesday, the head of Austria's central bank, Ewald Nowotny, had harsh words for credit ratings agencies.
The three major ratings agencies - Standard & Poor's, Fitch Ratings and Moody's Investors Service - have all lowered Greece's sovereign credit rating in recent months. The first two have already downgraded the country to below an "A-level."
That's important because it is the threshold the European Central Bank will use, starting next year, for collateral for its lending operations. If just one more ratings agency - Moody's - downgrades Greece to below that level, it could effectively shut down ECB loans to the country.
"The fate of Greece, and if you are going to be more dramatic, the fate of Europe, depends on the judgment of one rating agency. That is an unacceptable situation," Mr. Nowotny said.
The agencies are like "a black box," Mr. Nowotny continued, adding that a central bank would be a better judge than "three people sitting in an office in New York."
The comments came just a day before a report in a German newspaper that claimed the ECB is considering starting its own ratings system.
For the ratings agencies, it's an ironic twist. Once pilloried for being blind to the problems in complicated housing-related investments, they are now causing a headache for the ECB because their ratings could fall too low.
Pierre Cailleteau, Moody's global head of sovereign ratings, said the outcome hinges on the ECB rule on collateral, rather than the judgment of the ratings agencies. The ECB relaxed its requirements during the financial crisis but they are set to become more stringent at the end of this year.
That plan is not credible, Mr. Cailleteau said. "It's hard to understand why the ECB would have lowered the bar to help the banks and then raise it again at the price of creating a pretty significant European crisis."
"It's kind of a game theory" situation, he added. "In this story, I think we've shown a lot of composure."
With files from Reuters