Hedge funds are betting that Cyprus won’t default despite the country’s current bailout troubles.
The next round of bonds that Cyprus is due to pay, on June 3, are trading at 83 percent of their face value. The high valuation, for a country that seems at risk of default, means that those trading the bonds overwhelmingly think that the country will not default.
According to a Reuters article, the €1.4 billion issuance, which is due to be paid in early June, has a 3.75 percent interest rate attached to it. On Tuesday Cyprus parliament voted to reject a €10 billion bailout deal that would have seen the country’s depositors lose a percentage of their savings in order to pay for the country’s future.
About half of the bond issuance due in June is owned by hedge funds according to sources in the market place. Bonds are overwhelmingly traded by large institutions and funds rather than average investors. Those institutions are betting that the European powers will not inflict debt restructuring on Cyprus.
Cyprus is a tiny country, and one unlikely to rock the financial system, but its effects in recent days have been astounding. Despite the problems in the country’s parliament, hedge funds don’t seem to think there’s much of a chance that the country will default before June. That’s a large gesture of confidence from the market.
However, the market has been wrong before and there’s no guarantee that there will be a payout when June comes around. One of the questions that will surely be the subject of headlines in Cyprus is why the country sees fit to pay bondholders with money taken from the bank accounts of ordinary Cypriots. If the hedge fund bet is to be believed, this will not be an obstacle for the country’s leaders.
Hedge funds are likely to find out this week whether or not Cyprus will be heading toward Greek style debt restructuring. In this case, the smart money is on Cyprus finding away out of its current crisis and managing to put together some kind of deal without resorting to a makeover of its debt.
The people of Cyprus are likely to be hurt by the coming bailout deal, but those buying the country’s are likely to see a payout, according to themselves at the very least. Cyprus is an important indicator of how Europe deals with these crises. So far the grade has not been particularly good.