Hedge Funds Hold The ECB Hostage With Greek Gov’t Bonds

As the Troika (ECB, IMF, & EU) scythe is set to slash a “voluntary” a 50% haircut on creditor’s Greek bonds, restructuring could be held up by hedge funds that have built up very strong positions within the past half year. The Athens daily periodical Ekathimerini writes,

Hedge funds are taking on the powerful International Monetary Fund over its plan to slash Greece’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.

The hedge funds are allowed this position because Greek bonds do not have a “Collective Action Clause” which forces the minority into line under voluntary restructuring. So every single bondholder will have to accept the haircut to trigger the Greek bailout. The options are either a chaotic default and Eurozone destruction or the ECB caving into demands and firing up the printing press.

Ekathimerini again:

Bondholders need to give up some 100 billion euros ($130 billion) 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.

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.

So do the hedge funds get the last laugh or is it all just yet another car leaping the track behind this slow motion trainwreck?

There are of course many other forces at play here. The goal here is to reduce Greece’s debt-to-GDP ratio down to 120% through the haircut, or attempted controlled default. Barclays speculates on the possible outcomes.

Even with the haircut the government spending and structure is unsustainable and talks between the Institute of International Finance and the private bondholders broke down yesterday, with the latter saying the former would not agree to terms. The NYT reports many Greeks are heading back to farms and taking up the Earth again. They attempt to frame this return in terms of an atavistic national pride, but realistic signals predict an extremely long period of hard times for many people.

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