Q: What is being discussed?
A: The talks are aimed at agreeing on a plan to reduce Greece’s outstanding debt from 350 billion euros to about 250 billion euros in a negotiated swap of bonds. At a minimum, bondholders are looking at a 50 percent reduction in the face value of Greek bonds and potentially a much bigger loss.
One of the issues now holding up talks is just what the interest rate will be on the new set of bonds Greece will issue to replace its outstanding ones. Greece has said it doesn’t want to pay a coupon of more than 3.5 percent on the new bonds, while private creditors are demanding an interest rate of at least 4 percent.
Welcome to our latest issue of issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring Andurand's oil trading profits surge, Bridgewater profits from credit, and Tiger Cub Hedge Fund shuts down. Q1 2022 hedge fund letters, conferences Read More
Q: Who is at the negotiating table and what is at stake for each group?
A: There are three main groups involved in the talks: private creditors such as banks and hedge funds that hold Greek bonds, public and quasi-public institutions such as the International Monetary Fund that have pledged aid to Greece, and the Greek government.
The public institutions aren’t participating directly in the debt swap, but they have the power to reject any agreement Greece reaches with its private creditors on the grounds that it doesn’t go far enough to reduce Greece’s debt burden. Without approval from the public institutions, Greece can’t get the aid money it needs to get its finances back on track after the swap.
Q: So, are all the private creditors acting together? Do they all want the same thing?
A: No. Some holders of Greek debt are large European banks who bought Greek bonds when they were worth more than they’re trading for now. If the banks hedged their Greek debt holdings with credit default swaps (a derivative-like insurance product), they may stand to benefit from a Greek default by collecting on those swaps.
But the banks don’t want to cause too much disruption out of fear it will destabilize the rest of theeuro zone.
Other bondholders are hedge funds that bought Greek debt more recently than the banks did and at even cheaper prices. Some want Greece to default so they can collect on those credit default swap contracts because those derivatives will pay out more than the funds stand to make in the talks.
Other hedge funds have tried to buy up all the Greek debt that is governed by UK law instead of Greek law. They believe they stand a greater chance of getting a legal victory by suing in a British court than in a Greek one.
Q: Are the hedge funds the villains in this?
A: The hedge funds have attracted a great deal of attention over the past two weeks. In the media, the hedge funds are often portrayed as the group preventing a deal from being completed and only care about making money off Greece’s misery.
“They have the best legal advice and they are not going to cave,” said a Eric Sprott, who runs the fund Sprott Asset Management. “I think they have the upper hand in the discussions.”
But hedge funds may not be the real sticks in the mud that some make them out to be. One member of the negotiating committee estimates that hedge funds own between 5 percent and 10 percent of all Greek debt.