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Will Predatory Hedge Funds Succeed in Milking Greece for All It's Worth?

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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!)


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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.

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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.

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)

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  With every passing day, Europe move... by Richard Clark on Tuesday, Jan 24, 2012 at 7:51:29 PM
Synopsis of an article in yesterday's NY Times ... by Richard Clark on Wednesday, Jan 25, 2012 at 7:51:38 AM
  From   today's NY Times: ... by Richard Clark on Thursday, Jan 26, 2012 at 1:28:53 PM