Hedge Funds Are Positioning To Profit From Slashing Greek Debt

* Funds positioned for talks to succeed or fail

* Part bank-owned funds among the players

* Size of fund holdings may derail deal

By Tommy Wilkes and Sophie Sassard

LONDON, Jan 12 (Reuters) - 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.

Earlier on HuffPost:

Comments

[flaconoire]

09:24 AM on 01/15/2012

The corporate sharks are still feeding at the expense of the workers

[castlemike]

01:33 AM on 01/15/2012

http://uk.reuters.com/article/2012/01/13/uk-toscafund-greece-idUKLNE80C00S20120113

(Reuters) - A Greek exit from the euro zone would be worse than catastrophic and could provoke greater social unrest, Zimbabwe-style inflation and a military coup, said London-based hedge fund firm Toscafund.

In a stark note to clients, chief economist Savvas Savouri said introducing a new currency instantaneously in the wake of a euro exit would be impossible and the delay would lead to "a run on banks and evacuation of capital that would make what has already been seen as nothing by comparison".

Savouri said he would expect the euro to remain the currency of choice in Greece even if it left the euro and for the official exchange rate with the euro to be quickly undercut on the black market.

He predicted a range of problems for the country, from hyperinflation, extreme difficulty for the government in raising money on bond markets and an evacuation of people able to leave the country, taking as much wealth as they can with them.

"Inflation in Greece would quite frankly spiral in a way resembling Zimbabwe's experience," said Savouri, who also predicted severe poverty amongst the elderly.

"It would not be hyperbole to argue that the denouement of a Greek exit from the euro would be at worst the rise of poisonous political extremists and at best a military coup."

[altohone]

07:16 AM on 01/14/2012

Uh, JT. Did you miss the bailouts, the financial fraud crisis? Socialism had nothing to do with Wall Street excrement sold as risk free safety.

Or do you think only American taxpayers bailed out banks creating huge debt?

It was corporate welfare that made this mess. Offensive false generalizations about the poor do not aid the blame the victim PR.

[Erikhuffpost]

01:33 PM on 01/13/2012

For an insight into Greece's problems:
http://youtu.be/qKpxPo-lInk

[gerald4]

12:07 PM on 01/13/2012

If the USA, UK, PIIGS, etc. had a larger industrial manufacturing portion as a part of their GDP, then that would create additional new NATIONAL WEALTH more rapidly, and then these governments would be able to raise more funds to spend on government activities by CONFISCATING more of this newly created NATIONAL WEALTH from the wealth creators, and then not have to borrow WEALTH (US Dollars, Euros or other currency) back from foreign individuals (in the foreign industrialized nations) that US citizens paid to make the consumer items that we imported.

The de-industrialized nations must create their own new NATIONAL WEALTH to pay for all of their own government expenses without borrowing additional money from foreign individuals.

. http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

The International Trade Balances indicate that Brazil, Russia, India, China, (BRIC) nations, plus Pakistan, South Korea, and the other industrialized countries of the world with positive net foreign trade balances are NET CREATORS of NATIONAL WEALTH for their nations, and the de-industrialized USA and the de-industrialized European nations with negative net trade balances are NET CONSUMERS (DESTROYERS) of their existing NATIONAL WEALTH.

The USA and the PIIGS nations live “high on the hog” by continuously borrowing wealth from the industrialized countries.

[JTWallace]

11:52 AM on 01/13/2012

As the last 30 years have shown, socialism doesn't work. It depends on all beneficiaries to contribute their share of input in order to keep afloat. Nations have become used to a guarantee of a better economic life. However, they can't sustain this forever. These last years of economic downturn has proven that. We've begun to see the seeds of our own depression from the 60's on down when government took more of our taxes as unions assured themselves of their own interests. Welfare and loans not repaid, We've tried to fund every nation in need more so than any other nation which all it did was go into the pockets of dictators. Even within our own funding, we've spawned a nation of welfare where families from the mid to latter 60's have never worked nor will their offspring. Yet their proponents cry it's racial prejudice when we question the billions poured into this boondoggle. There are villages literally built for funded housing where tenants on total welfare with everything paid for, turn their areas into slums and crime ridden enclaves where their offspring lead lives of drug deals, murder, gangland warfare, yet when the suggestion the tenants should be responsible for the upkeep, who do you think called it ''Communist''. Yet the woman who angrily said this, never thought that this is exactly what brought Soviet Russia down.

[castlemike]

10:28 AM on 01/13/2012

Right check out the Greek short term interest rates.

Greece is broke and bigger players like Italy, Portugal, Spain and USA are also broke and bigger dominoes.

To many people forget the USA borrows 42 cents of every dollar it spends and what that means when it goes away or becomes self funded

Greece cannot be allowed to DEFAULT during a major election year by Wall Street and the TBTF Banks because of CDS counter party risk. To many other institutions will Fail globally because they cannot pay and CDS triggered by a Default will not make them whole.

There is to much over leverage in the financial system and no more pain free solutions.

As Jesse says:

http://jessescrossroadscafe.blogspot.com/

The Banks must be restrained, and the financial system reformed, with balance between individuals and the corporations restored to the economy, before there can be any sustained recovery

[excab2]

12:00 PM on 01/13/2012

Robbing Peter to pay Paul. It is a quilt pattern, but it goes double here with far more dire consequences..

[Jim Marusak]

12:28 PM on 01/13/2012

and a tv report from ms cabrera at CNBC a couple of minutes ago are saying that Greece is about to make an ultimatum, either take the voluntary cut, or we'll involuntarily default. and the involuntary route triggers the derivatives. so in march, we'll see how the system triggers work and who has what cash on hand for what CDS/CDO contracts to pay off.

[mbo2]

02:18 PM on 01/13/2012

fore that reason, Obama will clandestiney fund the situation to drag it out till after the election, on the U.S. taxpayer's dime

[Uber]

06:29 PM on 01/13/2012

Another functional illiterate in the tea party.

[Ed Red]

09:16 AM on 01/13/2012

My understanding hedge funds are insured so need to accept deal. Greece defaults they get 100 cents on the dollar. Why accept the deal?

Get 300 cents on the dollar?

[becky bradshaw]

10:39 AM on 01/13/2012

Like insurance on an auto, the design usually encourages desired behavior. With auto insurance, it is called a "deductible". Insurance on a hedge fund, especially funds bought at a discount, would likely have similar provisions. But those contracts are not public, so we have to make logical deduction.

Note the hedge fund that kept their name out of the newspaper again. Goldman Sachs is probably the biggest elephant in room in history.

”What do Mario Draghi, Mario Monti, and Lucas Papademos have in common? Well the new president of the European Central Bank, the new Italian and Greek Prime Ministers (respectively) all belong to Goldman Sachs. The US investment bank has indeed woven a unique network of influence in Europe through a dense network.

"Mario Draghi, vice-chairman of Goldman Sachs in Europe between 2002 and 2005, is responsible for mixing companies and sovereign. As such, one of his missions was to sell the financial product “swap” to conceal part of sovereign debt, which helped disguise Greek accounts."

"And third is none other than Lucas Papademos, who was last week appointed as Prime Minister of Greece. Papademos was Governor of the Greek Central Bank between 1994 and 2002, and he apparently participated in falsifying accounts perpetrated by Goldman Sachs in the year 2000 under the ruling PASOK party of Costas Simitis.”

http://www.lemonde.fr/europe/article/2011/11/14/goldman-sachs-le-trait-d-union-entre-mario-draghi-mario-monti-et-lucas-papademos_1603675_3214.html

[Michael GE]

11:27 AM on 01/13/2012

"What do Mario Draghi, Mario Monti, and Lucas Papademos have in common?"

I will give you that it leaves me with a funny feeling, too. But (I learned that earlier this week in the press conference of PM Monti and Chancellor Merkel): Prof Monti was also a student of Prof Tobin (Financial Transaction Tax).

Also, I am not aware that someone with GMS ties is currently in placed anywhere in the top ranks of German fiscal and monetary politics. Certainly FM Schäuble isn't. And I just zapped through some of the main biographies (President of the Bundesbank, Council of Economic Advisors): All almost exclusively academic professorial careers. No "revolving doors" to any US or European private bank or hedge fund. Mr Asmussen, the German member in the ECB directorate hasn't even a doctoral degree, no "revolving door" to the private financial sector either. He had a startling career in financial politics. One could say the most influential figure is Prof Axel Weber (also "only" an academic career) who was professor and mentor of both Weidmann and Asmussen.
And no need to stress that Chancellor Merkel also does not have any ties to US private banks ;).

In other words: I have doubts that it's that easy. For all I can tell presently, there is just no indicator. What PM Monti does say/plan (for Italy) actually sounds quite balanced.

[excab2]

01:21 PM on 01/13/2012

And the beat goes on. The fat cats just getter fatter and bigger. This stinks to high Heaven. Thanks for the information. Who would have thought it? These people must stay up at night figuring out these ponzie schemes.