Vultures circle Greece before bond deadline

“You have a dying corpse and everyone is trying to get a bite,” Andreas Koutras, a Greek national and analyst at London’s In Touch Capital Markets, told Channel 4 News.

The question of whether Greece, which still has not formed a government, can repay 436m euros due on a floating rate note issued 10 years ago has rollicked the markets.

Vulture funds, which target countries who may default on their obligations, bought Greece’s international bonds at a discount and are now demanding payback at face value. If Greece refuses to pay up, the funds will threaten to drag Greece through the English courts for payment in a year or two.

Argentina-style banking

“The chances of these bonds being paid right now are very slim,” Mr Koutras said. “If these bond holders come from hedge funds who’ve done this before they know how the game is played. That means litigation. If they are sophisticated bond holders then you will have litigation like in Argentina.”

Funds who reportedly bought Greek government bonds (GGBs) include Elliott Associates, which successfully held out on Argentina’s and Peru’s sovereign restructurings.

US asset managers Loomis Sayles and BlackRock, Swiss bank Julius Baer, French asset manager Natixis, German fund StarCap and Luxembourg-based Ethenea Independent Investors bought about 150mn euros of Greek sovereign debt in the secondary market in 2011, according to Bloomberg data.

The likelihood that other funds have been “building up their positions,” buying debt for 40 per cent face value, is high, Reuters reported, noting the bet had already worked for some funds as Greece paid out on smaller debts to get rid of the claims.

“You have forces – some on the right, some on the left, also the media and the oligarchs, quite a few oligarchs – they aren’t conspiring, but they all see the benefits of seeing Greece destroyed,” Mr Koutras told Channel 4 News Online.

English justice

Funds target international bonds governed by English law because they tend to be foreign-denominated bonds and Greece can’t legislate amendments. English law-governed GGBs have traded at a premium recently as a result. A June 2013 US dollar-denominated GGB has traded, roughly,15 cents on the euro higher than comparable domestic GGBs.

European politicians might be so desperate for a deal, however, that they provide bailout funds that allow Greece to pay vultures off, essentially using European taxpayer money. No matter the scenario, the vulture funds win.

Another big winner if Greece exits the euro, at least initially, is expected to be investors holding gold, viewed by many as a safe haven. There is also the likelihood that Greece will protect its own banks and their depositors, while ignoring everyone else, analysts said.

It is not a question of who wins, but who loses less, Mr Koutras said.

Predicting bankruptcy

Companies holding euros would rather see their debts denominated in worthless drachmas to take advantage of financial holdings outside Greece, Mr Koutras said. “The same goes for many companies and oligarchs because they have most of the money outside.”

Sophisticated investors have had years to prepare strategies as Greece was a disaster waiting to happen rather than a sub-prime or property-related problem with the banks. In 1998, Greece had a debt of more than 100 percent of Gross Domestic Product. The numbers were there, whether the market misread them or thought the Germans would repay Greek debt is another matter, Mr Koutras said.

“Potentially, Greece is not a poor country. It is just heavily mismanaged. Who doesn’t want a nice property in the sun on a Greek island? But the political elite, they skewed and screwed the system,” Mr Koutras said.

“For most of us who lived and worked in Greece we were surprised it took so long. I was expecting this to happen in 2004.”