And if so, what
are the chances that this effort, to milk Greece dry, will lead to the
collapse of the global economy?
Hedge funds
have long been known to use hardball tactics to make big money. Now they have come up with a new one:
suing Greece in a human rights court to force it to make good on its
bond payments! What are the implication
of this for the rest of us? Answer: they are not good, and here's why:
These hedge
funds plan to argue in the European Court of Human Rights that Greece has
violated bondholder rights. But that
could be a multiyear project with no guarantee of a payoff. And it would not be likely to produce
sympathy for these hedge funds --
which many blame for the lack of progress so far in the negotiations over 'restructuring'
Greece's debts (in this case cutting the amount of each of the debts by half).
Greece was
considering passing legislation to force all private bondholders (like hedge
funds) to take losses, yet exempting the European Central Bank, which is the
largest institutional holder of Greek bonds (about 50-billion-euros worth).
Legal
experts suggest that the hedge fund investors may have a good case against the
Greek government because if Greece changes
the terms of its bonds so that investors receive less than they are owed,
that can well be viewed as a property rights violation -- and in Europe,
property rights are human rights.
Problem is,
the bond 'restructuring' (halving the value of each of the bonds) is a requirement
for Greece to receive its latest bailout
from the international community. As
part of that 130-billion euro ($165.5 billion) rescue, Greece is in this way
expecting to cut its debt by 100 billion euros through 2014. It plans to do this by forcing its 'friendly'
banksters to accept a 50% loss on the substitute 'new' bonds that they would
receive in exchange for their old ones!
According to
one senior government official involved in the negotiations, Greece will
present an offer to creditors (including the hedge fund bond owners) this week
that features an interest rate (on the new bonds received, in exchange for the
old ones) that is less than the 4% that
creditors have been pushing for -- and those
creditors will be forced to accept it whether they like it or not. (No wonder the hedge funds are planning
on going to court in response!)
The surprise
collapse last week of these talks in Athens raised the prospect that Greece might not receive a crucial 30-billion
euro payment from the EU & IMF and might then miss a make-or-break 14.5-billion
euro bond payment on March 20 -- throwing the country into default and
jeopardizing its membership in the Eurozone.
Charles
Dallara of the Institute of International Finance, represents private-sector
bondholders, and met with Prime Minister Lucas Papademos of Greece and his
deputies. While both sides have tried to
adopt a conciliatory tone, the threat of
a disorderly default and the spread of contagion to other vulnerable
countries like Portugal remains strong.
At the root
of the dispute is a growing insistence on the part of Germany and the
International Monetary Fund that, as Greece's economy continues to collapse, its debt -- now about 140% of its gross
domestic product -- needs to be reduced as
rapidly as possible.
To summarize:
These two powerful actors, Germany and the IMF -- which control the purse
strings for current and future Greek bailouts -- have pressured Greece to adopt a more aggressive attitude toward its
creditors (e.g. the predatory hedge funds).
Because of this, Greece has
demanded that bondholders accept not only a 50% loss in accepting their new substitute
bonds, but also a lower interest rate on those substitute bonds. That is a tough pill for investors to
swallow, given the already steep losses they face; it means they would be subjected to total losses
of about 70 percent!
The lower
interest rate would help Greece by reducing the punitive amounts of interest it
pays on its debt, thereby making it easier to cut its budget deficit.
To increase
Greece's leverage, the country's negotiators have said they could attach
collective action clauses to the outstanding bonds, a step that would give them the legal right to saddle all bondholders
with a loss. This would in particular
be aimed at the so-called free riders -- speculators who have said they will not agree to such losses and who
are essentially betting that when
Greece receives its aid bundle in March, their bonds will be repaid in full.
If the
collective action clause is used -- and Greek officials say it could become law
next week -- these "free-rider' investors, who bought their bonds at around 40
cents on the dollar, are likely to suffer a major loss. That, in turn, could prompt the lawsuits from
investors claiming in the Court of Human Rights that their property rights had
been violated, because Greece is changing the bond contract retroactively.
With their
considerable financial resources, some hedge funds may be willing to pursue
such a route, and they point to similar cases won by hedge funds in Latin
America. While the prospect of Greece
paying an investor any time soon is slim, the country wants to avoid a parade
of lawsuits across Europe, which would restrict its ability to raise money (i.e.
sell more bonds) in international markets.
Argentina, which defaulted on its debts in 2002, still faces legal
claims from investors that have made it nearly impossible for the country to
tap global debt markets, i.e. sell more bonds, borrow more money.
And it is
not just the legal cudgel that investors are threatening to use. Some hedge funds have discussed the
possibility of demanding a side payment, as they describe it, as a price that
both Europe and Greece must pay if the two want these hedge funds to participate in the
agreement.
