Hedge funds are taking on the powerful International Monetary Fund over its plan to slash Greece’s towering debt burden as time runs out on the talks that could sway the future of Europe’s single currency.
The funds have built up such a powerful positions in Greek bonds that they could derail Europe’s tactic of getting banks and other bondholders to share the burden of reducing the country’s debt on a voluntary basis.
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.
Without the money, the country is likely to default around March 20, when a 14.5 billion euro bond falls due. A deal needs to come well before that, because the paperwork alone takes at least six weeks.
On Monday German Chancellor Angela Merkel and French President Nicolas Sarkozy, the euro zone’s two leading powers, insisted private-sector bondholders must share in reducing Greece’s debt burden.
But the hedge funds are resisting, unlike European banks holding Greek bonds, who have been pressured to agree by politicians.
There are other barriers too.