By Andy Dabilis
As Greece struggles to survive its worst economic crisis since World War II, the role of the ultimate speculators — hedge funds — has complicated government efforts to secure a second bailout package from international lenders.
But the insolvency could make a few people very rich.
Amid reports that hedge funds that bought Greek bonds were trying to derail talks, Greek officials were engaged in a frenzy of talks with representatives of banks and investors over just how much of a “haircut” they would get — or be forced to take.
“People who lent Greece money want back as much as they can get, but others have shorted these loans and are looking for it to go completely bust,” former IMF official Elliott Morss told SETimes.
He said hedge funds have no incentive to co-operate to reach an agreement that would cost them money. “The reason there is still a market for Greek debt is because some people think it’s going to go bust.”
Even though Greece is technically bankrupt, some investors are still buying and holding short-term debt — taking a risk that Greece will get a second bailout and be able to pay its next installment of 14.5 billion euros in March.
The Troika, which was in Athens to urge Papademos and Finance Minister Evangelos Venizelos to adopt more stringent reforms — including pay cuts for the private sector, going after tax evaders and privatising state assets — said the money tap could be turned off unless Greek officials also reach an agreement with investors, a so-called Private Sector Involvement deal.
As the talks with investors have dragged on, many banks have sold their holdings to hedge funds in London and New York, who are more resistant to accepting losses than banks that can be squeezed by EU governments.
In a recent report, JPMorgan Chase estimated that as much as 80 billion euros in Greek bonds were owned by independent investors, including hedge funds, sovereign wealth funds and other asset managers.
“They have bought because banks don’t want to hold the debt,” Dimitri Vayanos, director of the Paul Wooley Centre for the Study of Capital Market Dysfunctionality at the London School of Economics, told SETimes. “They’re trying to cash in, not on Greece’s misery, but on the hopes that Greece will get a bailout.”
He said talks got tough because, “the government is not as well-organized to negotiate as the big players. It’s a game of chicken.”
Nonetheless, Venizelos said the deal is critical for Greece to reduce its debt from 160% to 120% of GDP by 2020 because it could save the country 100 billion euros in repayments.
While there has been criticism that the hedge funds were trying to profit from what seems to be the imminent demise of the Greek economy, many don’t agree.
“It doesn’t look fair at first glance, but this is how it always works. I don’t remember any Greek politicians or anyone from the public saying anything about this in the past. It’s just now that we’re losing money that we don’t like it,” Alexi Giannoulias, Senior Research Fellow at the Research Institute for European and American Studies in Athens told SETimes.
But the arcane world of high-finance means bets can backfire sometimes too. The risks investors are taking to forestall a deal which would force them to take big losses now — hoping to lead to a bigger payday in March — means they could discourage the Troika from providing Greece with more money.
“The basic problem is not that the hedge funds are trying to maximize their returns, but that the national governments in the EU fail to co-operate … to decide the best policy to overcome the crisis,” Pantelis Kammas, a lecturer in economics at the University of Ioannina in northern Greece, told SETimes.
He noted that if Greece fails, it could jeopardize the 17-member Eurozone countries. “It’s not rational to blame the markets for bad behavior.”
“It’s more realistic to ask our national governments to stop the political power game which is played in the EU, and to co-operate to secure our economies.”
But that’s a bet that remains on the table.