Hedging bets on a Greek default
by Costas Papachlimintzos
They are defined as investment vehicles, portfolios of investments or private investment funds. No matter how one tries to explain their name, their purpose does not change: hedge funds try to make money whatever the costs and to maximise the profits of their clients.
In private sector involvement (PSI) plans in the Greek public debt restructuring, not only is this purpose not being fulfilled, but hedge funds that hold Greek bonds are being called to accept losses.
The deal struck by the eurozone leaders after lengthy negotiations with the Institute of International Finance (IIF) is asking creditors to voluntarily write down 50 percent of the notional value of their bond holdings. Several hedge funds are hoping the Greek government and eurozone leaders, seeking to avoid the political embarrassment of a default, will allow them to opt out.
Sources familiar with the talks told the Independent after the temporary freeze in the negotiations on January 13 that a number of hedge funds are holding up the restructuring deal “to ensure that they make a fat profit, after snapping up Greek bonds at distressed prices”.
Moreover, on January 18, the New York Times reported that some hedge funds may sue Greece in the European Court of Human Rights if it imposes losses on their bond holdings.
“The tactic has emerged in conversations with lawyers and hedge funds as it became clear that Greece was considering passing legislation to force all private bondholders to take losses, while exempting the European Central Bank (ECB), which is the largest institutional holder of Greek bonds with 50 billion euros or so,” the newspaper wrote. (The ECB and the eurozone countries are not participating in the PSI.)
It is unclear how much of the Greek debt facing a haircut is in the hands of hedge fund managers. However, since July 21, when the first restructuring deal was struck in Brussels (and never implemented), many of the European banks have sold their holdings to hedge funds and other independent investors who are now refusing to accept a loss.
“They are calculating that Greece will not default before March,” said Mitu Gulati, a sovereign debt expert at the Duke University School of Law, told the International Herald Tribune. “If you own a bond that matures in March and it is January, then you have every incentive to delay.”
On March 20, Greece will have to pay around 14 billion euros to its creditors, the total value of the bonds that mature on that day. Hedge funds that have bought those bonds recently at a much lower price have bet on the EU and ECB pumping more money into the Greek bailout package to prevent Greece’s defaulting. In that case, bondholders will be paid out in full.
However, German Chancellor Angela Merkel has explicitly said that the next tranche of the bailout package, necessary for Greece to avoid a default in March, will not be disbursed unless the debt restructuring deal is completed first.
“I would expect to see some holdouts,” said Sudeep Singh, a hedge fund manager at Matrix Group Ltd, which doesn’t own Greek debt, told Bloomberg. “The industry breaks down into guys who want to keep on fighting and into guys who just want to get the best deal and move on. It’s all a question of what price you got in at,” he added.
It is also a question of how much credit insurance a hedge funds has bought on the bonds it owns and, therefore, how much it expects to earn in the event Greece defaults and credit default swaps are triggered.
by Costas Papachlimintzos
They are defined as investment vehicles, portfolios of investments or private investment funds. No matter how one tries to explain their name, their purpose does not change: hedge funds try to make money whatever the costs and to maximise the profits of their clients.
In private sector involvement (PSI) plans in the Greek public debt restructuring, not only is this purpose not being fulfilled, but hedge funds that hold Greek bonds are being called to accept losses.
The deal struck by the eurozone leaders after lengthy negotiations with the Institute of International Finance (IIF) is asking creditors to voluntarily write down 50 percent of the notional value of their bond holdings. Several hedge funds are hoping the Greek government and eurozone leaders, seeking to avoid the political embarrassment of a default, will allow them to opt out.
Sources familiar with the talks told the Independent after the temporary freeze in the negotiations on January 13 that a number of hedge funds are holding up the restructuring deal “to ensure that they make a fat profit, after snapping up Greek bonds at distressed prices”.
Moreover, on January 18, the New York Times reported that some hedge funds may sue Greece in the European Court of Human Rights if it imposes losses on their bond holdings.
“The tactic has emerged in conversations with lawyers and hedge funds as it became clear that Greece was considering passing legislation to force all private bondholders to take losses, while exempting the European Central Bank (ECB), which is the largest institutional holder of Greek bonds with 50 billion euros or so,” the newspaper wrote. (The ECB and the eurozone countries are not participating in the PSI.)
It is unclear how much of the Greek debt facing a haircut is in the hands of hedge fund managers. However, since July 21, when the first restructuring deal was struck in Brussels (and never implemented), many of the European banks have sold their holdings to hedge funds and other independent investors who are now refusing to accept a loss.
“They are calculating that Greece will not default before March,” said Mitu Gulati, a sovereign debt expert at the Duke University School of Law, told the International Herald Tribune. “If you own a bond that matures in March and it is January, then you have every incentive to delay.”
On March 20, Greece will have to pay around 14 billion euros to its creditors, the total value of the bonds that mature on that day. Hedge funds that have bought those bonds recently at a much lower price have bet on the EU and ECB pumping more money into the Greek bailout package to prevent Greece’s defaulting. In that case, bondholders will be paid out in full.
However, German Chancellor Angela Merkel has explicitly said that the next tranche of the bailout package, necessary for Greece to avoid a default in March, will not be disbursed unless the debt restructuring deal is completed first.
“I would expect to see some holdouts,” said Sudeep Singh, a hedge fund manager at Matrix Group Ltd, which doesn’t own Greek debt, told Bloomberg. “The industry breaks down into guys who want to keep on fighting and into guys who just want to get the best deal and move on. It’s all a question of what price you got in at,” he added.
It is also a question of how much credit insurance a hedge funds has bought on the bonds it owns and, therefore, how much it expects to earn in the event Greece defaults and credit default swaps are triggered.
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