STOCK MARKET WATCH -- Thursday, 27 December 2012

[Demeter]

21. Buying Back Greek Debt Rewarded Hedge Funds OF COURSE

http://www.nytimes.com/2012/12/24/business/global/greek-bond-buyback-may-have-been-cheaper-under-collective-action-clause.html?_r=0

Last month, the European Commission’s top economic official in Brussels, Olli Rehn, received an intriguing e-mail...Greece, under pressure from its European creditors, wanted to retire some of its debt by buying back its bonds at a deep discount to their face value. A senior executive at Deutsche Bank proposed that Europe take a tough negotiating stance toward private hedge funds that had bought Greek bonds. He urged officials to use a legal mechanism that would force the funds to sell at a lower price than they might voluntarily accept. The move was “perfectly legal” and would not “upset the markets,” the executive, Hakan Wohlin, argued. And by forcing private investors to sell low — for 28 to 30 cents on the euro, instead of the 34 to 35 cents many hedge funds were aiming for — Greece could achieve significant debt reduction at a reasonable cost. But in this latest showdown with private investors over Greece’s debt, Europe blinked first.

With litigious hedge funds and global finance’s most powerful lobbying group warning of a market crisis, European officials rejected the hard-line approach....When the results were tallied on Dec. 12, Greece had reached its target of buying back enough bonds at a discount to retire 21 billion euros, or about $27 billion, of its debt. The bigger winners, though, were hedge funds, which pocketed higher profits than many had expected, in yet another Greek bailout financed by European taxpayers....instead of the average price of 28 cents agreed to earlier, the offer was made at an average price of around 33 cents...when Greek bonds trading on the open market hit a low of 12 to 13 cents on the euro over the summer, some investors started to ignore the doomsaying on Greece and scoop up the country’s debt on the cheap. Among those investors was one of Citigroup’s in-house hedge funds, which piled into Greece even as the bank’s lead economist, Willem H. Buiter, was estimating a 90 percent probability of Greece leaving the euro. By the fall, Greek bonds had become one of Europe’s most popular high-risk bets. But as demand sent the price soaring to 25 cents on the euro, some money managers began to worry about how they might leave their positions...

To some experts, this latest chapter in the long-running Greek drama is another reminder of how private investors have outmaneuvered European officials at various stages of the debt crisis. And they caution that each time it happens, future debt workouts in the euro zone will become even more costly...Opportunistic hedge funds have profited handsomely from the euro zone crisis, be it by speculating in Greek bonds or by buying up the senior debt of failed Spanish banks. They have successfully bet that Europe, ever fearful of Greek-style contagion, will prefer taxpayer-financed bailouts to forcing concessions from the private sector.

“I just don’t understand why they did this,” said Mitu Gulati, a sovereign debt specialist at Duke University School of Law, who argues that Europe could have saved up to 2 billion euros. “This would have been an easy transaction to do, and still the hedge funds would have come out with a hefty profit.”

In Greece this year, so-called vulture funds like Dart Management were paid back in full after refusing to take the losses that most other private bondholders grudgingly accepted as part of the 100 billion euro Greek bailout that Athens and Europe agreed to in March. The big winners this time, according to bankers and investors, were American and European hedge funds like Greylock Capital, Fir Tree, Brevan Howard and Third Point, all of which snapped up Greek debt last summer as warnings grew that Greece might leave the euro and default on its debt. Many have booked gains of 100 percent or higher...They largely have the financial lobby to thank — in particular the Institute of International Finance, which is based in Washington and represents the interests of more than 450 banks, hedge funds and other financial institutions around the world. The institute played on fears in Brussels, Rome and Madrid that a hard-line approach to the hedge funds would create another round of market chaos. The warning was blunt: If Athens set off legal mechanisms in the bond contracts known as collective action clauses, forcing bondholders to accept lower prices, investors would stop buying the bonds of struggling European countries. That would be bad news for Spain and Italy — to say nothing of Portugal and Ireland when they return to global bond markets in 2013...

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