Hedge funds are positioning to profit from a plan to slash Greece's towering debt pile as Athens enters final talks that could sway the country's membership of the euro.
York Capital, the $14 billion fund part-owned by Swiss banking giant Credit Suisse, New York-listed Och Ziff, and $10 billion-strong Marathon Asset Management are among those who collectively may have built up sufficiently large positions to scupper the bailout deal, several sources close to the debt restructuring told Reuters.
The deal asks creditors to voluntarily write down 50 percent of the notional value of their bond holdings. But hedge funds may opt out, hoping that Athens will let them get away with it to save itself political embarassment.
"I think we'll hold out. People are so slow in Europe and by the time they've got everything in place logistically this might be the one window where investors might be paid back in full," said one hedge fund manager who owns Greek bonds.
The stakes for Greece are high. Without the deal, the international lenders will not bail Athens out a second time, which means it will likely default around March 20, when a 14.5 billion euro bond falls due.
But hoping that Greece will pay out after all looks increasingly like a dangerous strategy. According to three senior euro zone sources on Thursday, the country is likely to force all creditors into the deal.
"Unless these guys are all teaming up and getting a really good law firm, I still think it's going to be touch and go," said one of the sources close to the talks.
"I think politically it would look bad for the Greeks and the Europeans to let (a payout to hedge funds) happen... This is the exact thing the official sector hates."
Funds that have bought credit insurance on the bonds they own could gain by staying away however, if the changing of Greek bond contracts would be seen to amount to a default and trigger Credit Default Swaps (CDS).
BETS ON BAILOUT?
Reuters spoke to thirteen sources including hedge funds, advisors and sources familiar with current Greek debt trading, but they declined to reveal details of their strategy in the Greek debt restructuring.
New York-based York Capital Management, part-owned by Swiss banking giant Credit Suisse, is among the funds to have bought Greek debt, two of the sources said.
One source familiar with the firm said it owned a chunk of a Greek bond maturing in March, and was betting there would be a last minute bailout for the country.
Och-Ziff Capital Management, the $28 billion fund founded in 1994 by Daniel S. Och, also has a position in Greek bonds, three sources said. Och Ziff and York declined to comment.
Many funds have followed a more traditional strategy of buying the Greek bonds at distressed prices from banks keen to get the toxic paper off their books.
This means that these funds might sign up to the deal, if the terms on offer are better than the price they paid for their bonds. Others might hold out, hoping enough creditors will do the same and enabling them to exact a better payout from Greece.
Some 206 billion euros of Greek debt is in private hands, but it is unclear how much of that is owned by hedge funds.
Up to 25 percent of private creditors have not been identified, according to one source close to the talks.
DECADES OF EXPERIENCE
Other firms with an interest include Madrid-based Vega Asset Management, which resigned from the committee representing private creditors in talks over the bailout last year.
Founded in 1996 by former Banco Santander star trader Ravinder Mehra, Vega was once among Europe's largest hedge funds, managing close to $12 billion before suffering outflows. Vega declined to comment.
Two New York-based funds with decades of experience profiting from buying distressed debt are also involved.
One is Marathon Asset Management, a member of a private sector creditor-investor committee negotiating with Greece. A $10 billion credit focused fund run by Bruce Richards, it has an emerging markets credit team which specialises in distressed corporate and sovereign debt.
The other is Greylock Asset Management. It is headed by Hans Humes, who represented some $40 billion of creditor holdings during Argentina's record-breaking restructuring, and now sits on the steering committee.
Funds who have bought Greek debt in the last few months are likely to have paid anywhere between 20 and 45 cents on the euro, depending on the maturity.
By signing up to the deal, which is for a 50 percent haircut, they would still make a profit.
Reuters also reports that time is running short to clinch a deal on a voluntary debt exchange for Greece, private sector bondholders warned on Thursday during crunch talks, while eurozone sources said Athens might force reluctant investors to accept losses. Ekathimerini reports that PSI talks will continue on Friday:
Greek officials had sounded more optimistic earlier, describing the two-hour meeting between Charles Dallara – the head of the IIF bank group who is negotiating on behalf of all private sector creditors - and Greece's prime minister and finance minister as «interesting» and «creative».
"I'm cautious and very confident after this two-hour meeting,» Finance Minister Evangelos Venizelos said in a statement.
What is not clear is whether there will be sweeping take-up of the bond swap by Greece's private creditors or whether it will leave a hole in the second bailout package which has to be filled by fellow euro zone governments.
The swap aims to cut Greece's debt burden from 160 percent of the nation's annual output to 120 percent by 2020 and erase about 100 billion euros from the country's debt load of over 350 billion euros.
Banks have agreed to a «voluntary» 50 percent write-down on Greek debt holdings but the talks have been complicated by demands for further concessions, which has made it less attractive for some investors to take part on a voluntary basis.
Speculation has centred on whether that means euro zone governments would be forced to stump up more cash to save Athens, something that would be deeply unpopular in Germany and other northern euro zone countries.
IMF chief Christine Lagarde is also said to have warned Europe that Greece's economic prospects are deteriorating and the European Union will either have to put up more money to rescue Athens or debt holders will have to stomach steeper losses.
Asked to explain why Lagarde was discussing the possibility of Greece needing additional funds, Deputy Finance Minister Filippos Sachinidis said that could depend on the level of participation in the bond swap scheme.
"If the percentage of participation is not, for instance, 100 percent, then Greece may need further support from the side of our partners,» Sachinidis told Skai radio.
The talks cover the gamut of details, including the coupon rate, maturities and the option of introducing a collective action clause (CAC) that would force all creditors to sign up to the bond swap if a clear majority had voluntarily done so.
Three senior euro zone sources said on Thursday that Athens could impose retroactive collective action clauses to force creditors to sign up to the bond swap.
The clause may be required because sources say hedge funds who have picked up Greek debt are intent on staying out of the bond swap deal. 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.
Meanwhile, Bloomberg reports that two lawmakers from Chancellor Angela Merkel’s party said a Greek exit from the euro would pose a “significantly smaller” risk of contagion to the rest of the currency area than two years ago before Greece asked for aid. Someone should muzzle these idiots. Europe's north is bustling, its south closing down, but the reality is that booting Greece out of the eurozone would be disastrous for Europe in more ways than just plain economics.
Finally, the London Mail published a repulsive article claiming that children 'dumped in streets by Greek parents who can't afford to look after them any more'. This is utter rubbish. Greece is going through a terrible recession, struggling to complete these debt talks as their economy falters, but don't believe all the garbage you read or hear on the news, like Greeks are lazy.
Speaking of rubbish, Hank 'the tank' Paulson's former puppet, Neel Kashkari, sees more 'downside risk' in stocks. Below, Kashkari, now head of global equities at Pimco, talks about the outlook for global financial markets, stating that predicting Dow `like throwing darts'. Mr. Kashkari and global investors should be reading my comments more carefully, profiting off La Dolce Beta. I repeat, forget doomsayers and Euro skeptics like Kashkari et al., it's time to crank up the risk!!!