Friday, 13 January 2012

Hedge funds prepare to show their middle finger to the European Union and IMF

Besides the risky bet on further quantitative easing, another hedge fund favorite has become purchasing Greek sovereign debt. Some of the hedge funds amassed such large positions of Greek debt, that they may have quite some bargaining power in the upcoming debt restructuring. Because the EU and IMF are going to ask for voluntary write-offs, in order to avoid a formal "bankruptcy", which would trigger the massive CDS market, the idea behind this speculation is to reject any kind of haircuts on their share of debt, and therefore pocket the "defaulted amount".

Mexican stand-off

It is unnecessary to say who the first victim of this Mexican stand-off will be, but, as a hint, it is unlikely to be the European Union or the activist hedge funds. Hedge funds will stand strong and, by acquiring positions both in government debt and hedging them using credit default swaps, they would profit from both a massive default and an agreement upon the restructuring of Greek debt. More from Ekathimerini newspaper:

"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.

EU Economic and Monetary Affairs Commissioner Olli Rehn said on Tuesday that negotiators were «about to finalize shortly». But time is running out."
Meanwhile the yields are continuing their exponential moves. Yield charts from Bloomberg:

With Greek 1Y maturity bonds now yielding a massive 400% for the first time, the markets are implying a massive restructuring of more than the 50% proposed by the EU officials:

 The 10y yield on government debt reached 32.36%, in a classical exponential move, while the 30y yield surged to 23.02%, and as most investors know, exponential moves tend to end in disaster.

 Seems like the most interesting day this year will not be 12.12.12, but more likely 20.03.12, the day when $14.5 billion in euro bonds fall due for roll-over. What happens on that day is anyone's guess.

No comments:

Post a Comment