Vulture funds fly past Greek debt carcass

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Funds with decades of experience calling the bottom of distressed sovereign bond markets are steering clear of Greece until policymakers realise a one-off bail in of private sector creditors will barely dent its spiralling debt woes.

In debt-crippled Greece, the funds say all holders — not just the private creditors thrashing out a deal with Athens — must swallow at least a 70 percent cut in the value of their debt to give Greece a fighting chance of returning to the capital markets.
“Our view all along has been there will be a hard restructuring in Greece…We think the best the Greeks can be expected to do is a 66 and two-thirds haircut but we see a bias towards 70 or 80 percent,” Robert Koenigsberger, founder and CIO of $2.7 billion fund Gramercy, said, Reuters reports.

So-called “vulture funds” seek to profit from swooping in on debt in, or close to, default, before trying to wring improved repayment terms from issuers who have cut debts to sustainable levels and who have the political stability to negotiate.

Koenigsberger, who played a key role in restructuring Argentina’s record-breaking $100 billion 2002 default and Russia’s in 1998, says Greece must slash its debt to a sustainable level of between 40 and 50 percent of GDP, way below its current 160 percent.

A current proposal to write down debt by 50 percent would cut Greece’s debt to GDP ratio to 120 percent by 2020, which Koenigsberger argues is still too high for such a weak economy.

New York-based Greylock Capital Management’s founder Hans Humes, another veteran of sovereign defaults who represented some $40 billion of creditor holdings during Argentina’s restructuring, says piecemeal haircuts are unlikely to work.
“The problem is by the time you start implementing a haircut, you don’t know where Europe is going to be. I think they might have to have a proper default, a restructuring and then negotiate the debt,” he told Reuters.

FINANCE MINISTRY “TURNSTILE”

Vulture fund methods can range from friendly negotiations to bringing lawsuits against states that last years — but any eventual decision to get involved in Greek debt is complicated by the fact most Greek bonds are governed by local law.

Athens could insert into its own laws so-called “Collective Action Clauses” — rare in the defaults vultures have successfully challenged in the past — to squeeze out minorities opposing any government writedown.

In Argentina’s case, funds were able to seek legal redress using New York law, under which many of the bonds were issued.

How and if funds would battle Greece for payoffs is not yet clear, but in the past some have been ready for a long fight.

In 2000, Hedge funds EM Ltd and NML Capital Ltd, an affiliate of Elliott Management, won a hefty payment from Peru after that country’s 1995 default. They are still suing Argentina for payments.

Gramercy expects bondholders will eventually have to accept a much bigger writedown than the 50 percent proposed — at 70 percent across all creditors. Factoring in funding and political uncertainties that will extend beyond that, he values Greece’s 2013 bond at 16 cents in the euro far below the 35 cents it trade near in secondary markets.

But any decision on when to invest is not just a question of prices. The funds want to be sure they have a stable partner in government before sitting down at the negotiating table.
“If you’re sitting there buying 24 cents assets thinking you’re going to get a quick restructuring, you’re missing the fact that when there is a turnstile at the finance ministry and the presidential palace, there is no-one to talk to,” Koenigsberger said.

Greece’s new coalition government led by technocrat Prime Minister Lucas Papademos may struggle to secure the cross-party support the country needs to access new EU-IMF funds. Argentina saw four new presidents between 1999 and 2003 during the height of its economic crisis.

FREE-RIDING

Though some distressed debt managers may be reluctant to get involved in Greece yet, a small band of hedge funds are taking the plunge.

One of the more popular bets is to buy short-dated Greek bonds — like the March 2012 bond trading at close to 40 cents — and then bet Athens will pay out in full when the debt comes due, two sources familiar with distressed trading told Reuters.
“That trade is an exceptionally risky strategy…The problem I have with that is it assumes the PSI will be successful and Greece won’t be in a hard default,” Koenigsberger said.
“I was in Europe a year ago and people were telling me about that trade. That was when (the bonds) were trading at 78 to 80 and now they trade at 38.”

Humes said fundamental value in Greek bonds is irrelevant as long as some holders wanted to offload positions.
“You need the forced sellers to get out of the way. I haven’t seen wholesale selling of Greek debt. When you see the European (investors) belt this stuff out then you are going to find some sort of technical level,” he said, adding that Greek bonds could trade as low as 10 cents in the euro.



The spread of Europe’s sovereign debt crisis to Italy is also making the entire analysis of Greece a difficult one, and Koenigsberger is not willing to rule out a default there.
“The Soviet Union/Russia was said to be too big to default, and they had nuclear weapons, and yet we let them default twice in one decade. I keep hearing Italy’s too big to default, too big to bail, too big to fail, well I heard all that about Russia.