Hedge Funds Complicate Greek Bailout

Jan 11 2012 | 9:20am ET

Some hedge funds are refusing to accept a plan to cut Greek debt, betting instead that Greece will default, reports the German business paper Handelsblatt.

Handelsblatt did not reveal its sources, but says the hedge funds have bought both Greek debt and credit default swaps to protect them in the case of a default and therefore have no interest in the success of the bailout agreement.

Greece has been trying to persuade its private sector creditors to exchange their existing Greek bonds for longer-term securities—and to take a 50% haircut in the process. Nailing down such a deal is considered key to receiving a bailout payment from the IMF and the EU in March (a payment that could be as high as €30 billion).

The negotiations, known as the private sector involvement, or P.S.I., seemed to be getting somewhere a few months ago, reports the New York Times, when most of the estimated €200 billion in private sector debt was held by European banks (chiefly French and German). The banks had some reason to see the deal as preferable to a Greek default—they were also vulnerable to pressure from their home governments.

As the negotiations dragged on, however, banks saw another option: sell the debt to hedge funds, sovereign wealth funds and other asset managers who now, according to a recent JPMorgan Chase report, hold about €80 billion in Greek bonds. On March 20, when many of these bonds mature, the Greek government must come up with €14 billion, a sum it will only be able to raise with the help of the EU and the IMF.

Hedge funds are betting that when it comes to the crunch, the powers that be will make good on the bonds in March, even though, in the longer term, the market seems to believe Greece will default.

The Greeks have retroactively inserted “collective action” clauses into the bond contracts, says the NYT, which would allow the debtor to impose restructuring on all creditors once a certain majority of support for the P.S.I. is reached. But if the restructuring is imposed, it may not be considered voluntary and could trigger payment of the afore-mentioned credit default swaps.

The deal with the private sector investors was expected to lower Greek borrowing expenses by up to €100 billion through 2014, reducing Greece’s debt/gross domestic product ration to 120% by 2010 (from the current 143%).

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