Hedge Funds Bet Against Cypriot Default

Mar 21 2013 | 12:26pm ET

Despite Cyprus' rejection of the European Union's bailout terms, hedge funds appear confident that the country will not default on a €1.4 billion bond that comes due in June.

Bidding on that bond is at 83% of face value, Reuters reports, suggesting that hedge funds believe that Cyprus will eventually accept the EU's terms for the €10 billion bailout money. The country's parliament on Tuesday unanimously rejected the bailout, which would require a tax on bank deposits to raise €5.8 billion.

"There is a calculated gamble here that the contagion from deposit holders is less important than the contagion you would see if the Troika forced PSI in a second European country," one fixed-income fund manager told Reuters, referring to the Greek restructuring.

"Cyprus will be absolutely fine in the short-term," LNG Capital's Steven Mitra said.

Of course, not all hedge funds are so sanguine about Cyprus' ability to avoid a default. Greylock Capital Associates has sold three-quarters of its Cypriot sovereign debt holdings over the past two weeks.

"You're betting for five or 10 points at the risk of losing 40 or 50 or more," founder Hans Humes told Reuters. "You have to be really on top of your game with this trade. Cyprus really could default."

Greylock has boosted its holdings of the debt maturing in June, but Humes said Greylock was unlikely to hold onto it until then.

"Everybody freaked yesterday," he said. "I would say we sell them before the June deadline hits unless things stabilize quickly."

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