Hedge fund sharks are using financial terrorism to extract billions from the Greek people. And they can get away with it for one reason: the EU and America are enormously fearful that a Greek default would lead to a chain reaction of financial defaults that wd bring down the entire global financial system. Hopefully, Occupy Wall Street will one day grow into a movement large enough to end this kind of financial terrorism.

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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!)

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.

With the stakes so high for all concerned, a compromise may well be reached.   Germany and the IMF may realize that if the private sector is pushed too hard, the deal will collapse and they will then have to pay even more money to keep Greece afloat in the coming years.

By the same token, however, private-sector creditors eager to put the issue behind them may accept a larger loss, and exchange their nearly worthless Greek bonds for more valuable securities, even if those new bonds are half the nominal value of the originals.   That would at least offer protection if Greece has to restructure yet again, in the future.

As for the holdouts, they could run up millions of dollars in legal bills chasing after Greece in European courts, and they know that, so they may very well not go ahead with such lawsuits.

The question is whether there is enough debt relief for Greece -- and there may not be, because the fiscal and growth situation in Greece is dire and getting worse by the day.

Les Leopold puts it this way:  

In a Game of Financial Brinksmanship, Vampire Hedge Funds Are Trying to Suck Greece Dry

Leopold continues:   When it comes to institutionalized greed and corruption, nothing tops the too-big-to-fail banks like JP Morgan Chase, Bank of America and Goldman Sachs.   But these financial giants form only one part of the financial oligarchy.   Lurking in the shadows are aggressive hedge funds that are just as lethal to our economic wellbeing.   If Goldman Sachs is a vampire squid, as Matt Taibbi so aptly described it, then hedge funds are like schools of piranhas or sharks, eager to strip the financial carcass to the bone.   And at this very moment the sharks are circling Greece, waiting to devour that nation's resources once it keels over.  

As Leopold explains, our vampire squid banks played a critical role in exacerbating the Greek debt problem.   When Greece hit the debt limits set by the EU, large US banks profited mightily by structuring loans to Greece that would skirt those debt limit rules.

The biggest blow came from the 2008 financial crash, which was wholly caused by Wall Street's reckless gambling spree.   When the world economy nearly collapsed into another Great Depression, the weaker economies in the EU took the biggest hit.   Ireland, Portugal and Greece suffered enormous job loss and massive declines in tax revenues.   These countries became the victims of the vast housing bubble that was pumped up by Wall Street's various financial schemes.   Yes, they had accumulated too much debt, but the problem would have been manageable were it not for the Wall Street-created crash.

Enter the piranha hedge funds

Hedge funds are lightly regulated, privately managed, investment funds created and designed for the super-rich, who expect to get much higher rates of return than the rest of us.   While you and I are lucky to see a 2% increase in our 401Ks, hedge funds hope to see gains far in excess of 10%.   Pension funds and endowments followed the super-rich into these funds in order to gain access to these outsized returns.   There are 8,000 or so hedge funds that now manage a total of nearly $2 trillion in investments.   And those SOB hedge funds are circling Greece right now, doing all they can to get their hands on the money the European Union wants to lend Greece to reduce its long-term debt problems.

Problem is, Greece does not have enough money to pay off the loans that are coming due in the next year.   So the EU and the IMF have assembled a bailout package to help Greece make those payments.   In exchange, the Greek people are being asked to suffer through enormous cuts in government spending -- which means cuts in jobs, incomes, healthcare, pensions and public education.   Everyday citizens are making enormous sacrifices.

But the European Union also insists that the bond holders of Greek debt take a hit.   After all, under the supposed rules of capitalism, if you make a bad loan, you suffer the losses.   So, as already explained, the EU wants to recall the old bonds and replace them with new ones having half the value as well as lower interest rates more suited to Greece's poor financial condition.   Imagine that!   Financial elites are being asked to sacrifice to pay for the problems they helped create.

Not surprisingly, the elites don't like it.   You see, opportunist wheeler-dealer speculators that they are, hedge funds have been buying up Greek bonds at steep discounts, and they expect(ed) to make a killing.   So they are refusing to accept the lower interest rates the EU is offering.   The hedge funds want to capture as much of the EU bailout money as possible.   They could care less how much that requires the Greek people to suffer.

But wait -- why are the hedge funds refusing the offer when the alternative is having Greece default on the very bonds the hedge funds now own?   -- If they continue to hold out, won't the hedge funds risk ending up with nothing at all?

So here's where things get especially dicey and especially alarming.  

The hedge funds think they have covered their bets by taking out financial insurance on their bonds, which insurance would pay them the full value of the bonds (not just the discounted price) if Greece defaults.   These insurance policies are called credit default swaps (CDSs), and are issued by big banks that profit greatly from collecting all the insurance premiums.   Problem is, these banks don't have enough capital on hand to pay off on all these insurance policies in the event of a massive collapse.   Therefore, this would require another huge government bailout.   So, if Greece doesn't give them a better deal on their bonds, the hedge funds will welcome a default -- in order to collect fully on their financial insurance policies.   But that presents a major risk to the rest of us.   Why?   Because the entire world financial system might collapse, including our own of course, if Greece defaults.   Why such a collapse?   Once again:   Because there is a very good chance that the banks issuing all this insurance have nowhere near enough in the way of real assets to pay off, on all these CDS insurance policies they've issued.

In other words, it could be like AIG's default all over again, when that giant insurance company couldn't pay off its financial insurance policies.   And if one big bank fails to deliver, it could set off a chain reaction of financial defaults around the globe.  

Credit default swaps [investment insurance policies] are to "hedging" credit exposure what nuclear weapons are to "hedging" a nation's defense requirements.   Yes, with a nuclear stockpile, you pay less money than equipping a huge army, but if you ever have to use the nukes, everything blows up.   Much the same with credit default swaps:   If lots of players try to cash in on these CDS insurance policies, to collect from the issuing banks that are way-far overextended, widespread catastrophe is the likely result.

In the old days, bankers basically didn't bet against their clients.   If the borrower's enterprise was successful, the banker was successful as the loan made money.   If a banker thought the credit risk was bad, he didn't hedge it by buying a credit default swap;   he simply refused to extend the loan (buy the bond) -- or else he demanded a lot of collateral against which the loan was secured.   Nowadays, however, no credit analysis is done, and "hedging" is done through these toxic instruments (called CDSs) which have no social value and which collectively create a hugely unstable financial system.

To put it bluntly, and in the simplest possible terms, the sharks are using financial nuclear blackmail to extract billions from the Greek people.   And they can get away with it for one reason:   the EU and America are enormously fearful that a Greek default would lead to a chain reaction of financial defaults that would bring down (vaporize) the entire global financial system.     

Hopefully, one day, Occupy Wall Street will grow into a movement large enough to end this kind of financial terrorism.   Until then, as Les Leopold points out, in his breakthrough article , which I've just summarized here, there's little we can do to prevent the Greek people from being forced to transfer much of their remaining wealth to these predatory hedge funds.

Authors Bio:

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 always been more interested in political economics and what's going on behind the scenes in politics, than in mechanical engineering, and because of that I've rarely worked more than 8 months a year, devoting much of the rest of the year to reading and writing about that which interests me most.