Hedge Funds Force Up Greek Debt Buyback Price

Dec 4 2012 | 1:16pm ET

Hedge funds continue to be a thorn in the side of deeply-indebted governments, forcing Greece and the European Union to agree to pay more for Greek debt at a buyback auction.

European finance ministers, in approving plans for the buyback, pledged to pay no more than 28% of the debt's face value. Then, hedge funds, buoyed in part by favorable U.S. court rulings for Elliott Associates in its battle with Argentina, began to snap up the Greek debt, forcing the country and the EU to accept a range of 32.1% and 34.1% for the bonds.

Greece plans to buy back some €10 billion in debt in a Dutch auction ending Dec. 7. At the higher end of the range, enough hedge funds are expected to tender their debt to reach the level required for the buyback to go through.

Hedge funds including Appaloosa Management, Fir Tree Partners, Moore Capital Management and Third Point are among those buying up the debt to be bought back. The hedge funds hope that a less-indebted Greece will eventually be forced to pay more for bonds that once went for as little as 13% of face value.

"The official sector continues to demonstrate its total misunderstanding of how markets operate," Julian Adams of Adelante Asset Management, another Greek bond investor, told Bloomberg News. "The whole saga has been a textbook case of how not to do this sort of thing."

Most hedge funds are refusing to say whether they'll participate in the auction. But Adams told Reuters that there "does not seem to be much downside in not participating," although he said Adelante might sell at the top of the range.

Another hedge fund holding the debt, Greylock Capital Management, couldn't help but crow over its good fortune.

"We have obviously done quite well on this," Hans Humes, president of the New York-based hedge fund, said. "To the extent that we can use the buyback as a partial exit from our position, that is great."

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