Far from trading desks in London and New York, some multinational corporations had reasons of their own to make negative bets on the euro. Coca-Cola generates euro income equal to roughly $3 billion a year. Coke needed to protect the value of that revenue when it was converted into dollars.
At Coke headquarters in Atlanta, the volatility in the euro—its value ranged from $1.26 to $1.51 during 2009—was making decisions difficult for the company’s treasury office. By late 2009, to protect itself against a euro that had begun falling, Coke was using put options, which gave it the right to sell euros at a given price for a given period. Their value would rise if the euro fell further. A company spokeswoman said it hedges its euro risk each year.
Mr. Melcher, a former Olympic fencer, had named Balestra after a fencing maneuver. Now he and his partners began buying credit-default swaps on hundreds of millions of dollars of bonds issued by European governments, including Greece.
The credit insurance “was so cheap it didn’t matter if we were wrong,” says Mr. Melcher.
Early this year, Balestra began calling dealers and offering to sell a large chunk of the fund’s now-much-more-valuable credit-default swaps. In other words, this hedge fund’s trading was tending to lower the price of insurance on Greek debt, arguably making investors less concerned about Greece rather than more.
Sometimes it was more-traditional investors doing the trading that critics assail. Banks, for instance, often bought credit-default swaps on Greece. They did so, in part, simply because they had property to protect—their holdings of Greek bonds.
Traders say buyers of credit-default swaps in late 2009 and early 2010 included Goldman Sachs Group Inc., Barclays, Spain’s Banco Santander and France’s Credit Agricole SA. According to the traders, Credit Agricole bought insurance to hedge exposure to Greece as well as Italy, Germany and the U.K.; Banco Santander protected British, German and French trading positions; and Barclays hedged its exposure to Italy, France, Greece, Germany and Portugal.