Hedge Fund Holdouts, Greece Spar Over Debt Deal

Jan 18 2012 | 11:53am ET

A group of hedge funds and the Greek government may be on a collision course if talks between the deeply indebted country and its creditors do not produce an agreement this week.

Five hedge funds, which together own a chunk of the estimated $260 billion in Greek bonds held by creditors, have balked at taking more than a 50% haircut on those holdings. And Greek Prime Minister Lucas Papademos has threatened to force them to accept the losses by law if a deal cannot be reached. Without a deal, Greece could default on its debt as soon as March, with potentially catastrophic consequences for the global economy.

The hedge funds, GreyLock Asset Management, Marathon Asset Management, Och-Ziff Capital Management, Vega Asset Management and York Capital Management, snapped up the debt at distressed prices and want a guaranteed profit on the investments. The International Monetary Fund and Germany, the biggest contributors to Greece's bailout fund, want an annual coupon of 2% for new bonds, which would slash the value of those bonds by up to 75%. The hedge funds have refused to countenance a loss of more than 50%.

Charles Dallara, who represents private bondholders, is in Athens for talks after the IMF, European Central Bank, European Union and Greece convinced him that there was a significant chance at a deal.

If there isn't a deal, Papademos said he is prepared to declare war: Without 100% participation, he said, he'll pass legislation forcing holdouts to take the losses.

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