The best in Sports and Finance

Hedge funds lock horns with IMF on Greek debt

(Reuters) – Hedge funds are taking on the powerful International Monetary Fund over its plan to slashGreece‘s towering debt burden as time runs out on the talks that could sway the future of Europe’s single currency.

The funds have built up such a powerful positions in Greek bonds that they could derail Europe’s tactic of getting banks and other bondholders to share the burden of reducing the country’s debt on a voluntary basis.

Bondholders need to give up some 100 billion euros (83 billion pounds) of their investment in the planned bond swap, drawn up in October, but many hedge funds plan to stay out of it.

They either prefer letting the country go under, which would trigger the credit insurance they have bought, or hope to get paid out in full if enough others sign up. That puts them in direct conflict with the IMF, which wants to force Greece’s cost of financing down to an affordable level.

“The play is purely ‘they’ll be forced to pay me’. Greece will want to avoid a wider default� so if it managed to restructure 80 percent of the deal and pay the rest that’s still better,” said Gabriel Sterne at securities firm Exotix.

Without a deal, the IMF, the European Union and the European Central Bank — the so-called troika of official lenders — will not pay out a second bail-out package Greece needs to survive.

EU Economic and Monetary Affairs Commissioner Olli Rehn said on Tuesday that negotiators were “about to finalise shortly” . But time is running out.

Without the money, the country is likely to default around March 20, when a 14.5 billion euro bond falls due. A deal needs to come well before that, because the paperwork alone takes at least six weeks.

On Monday German Chancellor Angela Merkel and French President Nicolas Sarkozy, the euro zone‘s two leading powers, insisted private-sector bondholders must share in reducing Greece’s debt burden.

But the hedge funds are resisting, unlike European banks holding Greek bonds, who have been pressured to agree by politicians.

There are other barriers too.

Banks represented by the Institute of International Finance IIF.L agreed last year to write off the notional value of their Greek bond holdings by 50 percent, a deal designed to reduce Greece’s debt ratio to 120 percent of its Gross Domestic Product by 2020.

But they have been unable to agree on the fine print of the refinancing – the coupon, maturity and the credit guarantees. These will determine the bonds’ Net Present Value NPV.L, and thereby the actual hit the banks need to take.

DANGEROUS GAME

There are 206 billion euros of Greek government bonds in private sector hands — banks, institutional investors, and hedge funds — and it is likely that hedge funds have been building up their positions in the past months.

They have been snapping up chunks of Greece’s next big maturing bond, the March 20, for around 40 cents on the euro. Yields on the bond began to rise sharply in September and it was priced at 41-45.5 cents in the euro on Tuesday.

The bet is that other creditors will sign up to a voluntary deal, and that Greece will pay out in full the hedge funds who do not to avoid a default and trigger pay-out of Credit Default Swaps, a form of credit protection.

“Time is on your side, since investors, until now, have received full repayment on Greek debt obligations,” said Kristian Flyvholm at asset manager Jyske Invest.

Sterne, whose firm Exotix specialises in illiquid bond investing and counts hedge funds among its clients, said the bet had already worked for some funds. Greece paid out smaller issues maturing in December and January.

But it is a dangerous strategy.

Europe is increasingly likely to force investors to take a cut on their Greek bond holdings if they do not voluntarily sign up to the deal, Reuters reported in November.

Also, Greece could change its laws, which for the largest part do not contain the so-called Collective Action Clauses CAC.L that force dissenting minorities into line when new conditions are imposed on outstanding bonds.

It is unclear how large hedge fund holdings of Greek debt are. About 20 to 25 percent of Greece’s creditors were unidentified, and half of these could be hedge funds, one source close to the creditors told Reuters.

Whatever the scale of the hedge fund threat, the proportion of creditors seen likely to sign up for their haircut has slipped. The hopes are now 60 percent can be convinced by the end of the month, the same source said, far less than the 90 percent take-up the IIF was targeting in June.

At that low a level, it is unclear whether the troika of international lenders will consider the uptake big enough to warrant a pay-out of the second bail-out package.

IIF Managing Director Charles Dallara is due in Athens later this week for troika negotiations, and technical staff from the IMF are expected in the Greek capital from January 16.

IMF’S DOUBTS

The IMF itself seemed to throw doubt on the debt swap in an internal memo cited by German magazine Der Spiegel on Saturday.

According to the report, the IMF believes Greece will still be sinking under the burden of its debts even after a deal is struck, and that further measures may need to be taken if the country is to avoid default. Markets fear this could lead to reopening the October agreement.

In a leaked paper in October, the IMF already acknowledged that it’s the assumptions may need to be reassessed. That would mean lower interest rate payments by Greece, and an even more bitter hit for the banks.

The NPV loss for creditors could be near 65-70 percent and the coupon around 4.5 percent, bankers have indicated. Reuters reported in November Greece wanted a 75 percent NPV cut, a far higher number than the low 60s the banks had in mind.

Advertisements

8 responses

  1. Great post and right to the point. I don’t know if this is in fact the best place to ask but do you folks have any ideea where to hire some professional writers? Thanks in advance 🙂

    01/16/2012 at 3:25 AM

  2. Excellent post. I was checking constantly this blog and I am impressed! Very useful information specially the last part 🙂 I care for such info much. I was looking for this particular info for a long time. Thank you and best of luck.

    01/18/2012 at 1:57 AM

  3. Good post. I learn one thing more difficult on completely different blogs everyday. It can at all times be stimulating to read content from other writers and observe a little one thing from their store. I?d want to use some with the content material on my blog whether or not you don?t mind. Natually I?ll give you a hyperlink on your web blog. Thanks for sharing.

    01/18/2012 at 6:25 PM

  4. Pingback: Greek debt talks open Pandora’s box / Οι συνομιλίες για το Ελληνικό χρέος άνοιξαν το κουτί της Πανδώρας | Const4ntino's Free Zone

  5. This is tough. I’m not calling you out though, personally I think that its those that aren’t motivated to change.

    02/02/2012 at 4:07 AM

  6. That’s a very good feedback. I’m curious to think what type of impact this would have globally? People obviously get frustrated when it begins to affect them locally. I’ll check back to see what you have to say.

    02/06/2012 at 9:21 AM

  7. Simply wish to say your article is as astounding. The clearness in your post is just spectacular and i can assume you’re an expert on this subject. Fine with your permission let me to grab your feed to keep updated with forthcoming post. Thanks a million and please keep up the enjoyable work.

    02/08/2012 at 9:27 PM

  8. Hey there, You’ve done an excellent job. I’ll definitely digg it and personally suggest to my friends. I’m confident they will be benefited from this website.

    02/09/2012 at 10:43 PM

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s