Payback sure is a bitch. After being demonized for everything from the tiniest tick down in the EURUSD, to blowing out spreads in CDS, to plunging stocks across the insolvent continent, hedge funds, long falsely prosecuted for everything, even stuff they patently did not do, are about to have their day in the sun, precisely in the manner we predicted back in June of last year when we posted: "Greek Bailout #2 Is Dead On Arrival: A Few Good Hedge Funds May Have Called The ECB's Bluff, And Hold The Future Of The EUR Hostage." Back then we wrote: "we may suddenly find ourselves in the biggest "activist" investor drama, in which voluntary restructuring "hold out" hedge funds will settle for Cheapest to Delivery or else demand a trillion pounds of flesh from the ECB in order to keep the eurozone afloat. In other words, the drama is about to get very, very real. And, most ironically, a tiny David is about to flip the scales on the mammoth Goliath of the ECB and hold the entire European experiment hostage..." Sure enough, we were right yet again. Ekathimerini writes: "Hedge funds are taking on the powerful International Monetary Fund over its plan to slash Greece's towering debt burden as time runs out on the talks that could sway the future of Europe's single currency. The funds have built up such a powerful positions in Greek bonds that they could derail Europe's tactic of getting banks and other bondholders to share the burden of reducing the country's debt on a voluntary basis." Oh no, they will let it happen, but first Europe will pay, with real interest, for every single incident of hedge fund bashing and abuse over the past 2 years. We estimate the final tally, to US taxpayer mind you, will be about $20 billion, to remove the "nuisance factor" of hold out hedge funds. Congratulations Europe - you have proven to be a continent full of idiot "leaders" once again.
Bondholders need to give up some 100 billion euros ($130 billion) of their investment in the planned bond swap, drawn up in October, but many hedge funds plan to stay out of it.
They either prefer letting the country go under, which would trigger the credit insurance they have bought, or hope to get paid out in full if enough others sign up. That puts them in direct conflict with the IMF, which wants to force Greece's cost of financing down to an affordable level.
"The play is purely 'they'll be forced to pay me'. Greece will want to avoid a wider default. so if it managed to restructure 80 percent of the deal and pay the rest that's still better,» said Gabriel Sterne at securities firm Exotix.
Without a deal, the IMF, the European Union and the European Central Bank -- the so-called troika of official lenders -- will not pay out a second bail-out package Greece needs to survive.
EU Economic and Monetary Affairs Commissioner Olli Rehn said on Tuesday that negotiators were «about to finalize shortly». But time is running out.
Not complying with hedge fund hostage demands? Why the end of the Eurozone of course.
Without the money, the country is likely to default around March 20, when a 14.5 billion euro bond falls due. A deal needs to come well before that, because the paperwork alone takes at least six weeks.
On Monday German Chancellor Angela Merkel and French President Nicolas Sarkozy, the euro zone's two leading powers, insisted private-sector bondholders must share in reducing Greece's debt burden.
But the hedge funds are resisting, unlike European banks holding Greek bonds, who have been pressured to agree by politicians.
Banks represented by the Institute of International Finance (IIF) agreed last year to write off the notional value of their Greek bondholdings by 50 percent, a deal designed to reduce Greece's debt ratio to 120 percent of its Gross Domestic Product by 2020.
But they have been unable to agree on the fine print of the refinancing - the coupon, maturity and the credit guarantees. These will determine the bonds' Net Present Value (NPV), and thereby the actual hit the banks need to take.
There are 206 billion euros of Greek government bonds in private sector hands -- banks, institutional investors, and hedge funds -- and it is likely that hedge funds have been building up their positions in the past months.
Naturally, every passing day makes the HF negotiation position stronger, and that of the European banking cabal, and of the fat idiots in Brussels, that much weaker
The bet is that other creditors will sign up to a voluntary deal, and that Greece will pay out in full the hedge funds who do not to avoid a default and trigger pay-out of Credit Default Swaps, a form of credit protection.
"Time is on your side, since investors, until now, have received full repayment on Greek debt obligations,» said Kristian Flyvholm at asset manager Jyske Invest.
Sterne, whose firm Exotix specializes in illiquid bond investing and counts hedge funds among its clients, said the bet had already worked for some funds. Greece paid out smaller issues maturing in December and January.
The alternative? Europe lets the chips fall where they may.
Europe is increasingly likely to force investors to take a cut on their Greek bondholdings if they do not voluntarily sign up to the deal, Reuters reported in November.
Also, Greece could change its laws, which for the largest part do not contain the so-called Collective Action Clauses (CAC) that force dissenting minorities into line when new conditions are imposed on outstanding bonds.
It is unclear how large hedge fund holdings of Greek debt are. About 20 to 25 percent of Greece's creditors were unidentified, and half of these could be hedge funds, one source close to the creditors told Reuters.
Whatever the scale of the hedge fund threat, the proportion of creditors seen likely to sign up for their haircut has slipped. The hopes are now 60 percent can be convinced by the end of the month, the same source said, far less than the 90 percent take-up the IIF was targeting in June.
At that low a level, it is unclear whether the troika of international lenders will consider the uptake big enough to warrant a pay-out of the second bail-out package.
IIF Managing Director Charles Dallara is due in Athens later this week for troika negotiations, and technical staff from the IMF are expected in the Greek capital from January 16.
The IMF itself seemed to throw doubt on the debt swap in an internal memo cited by German magazine Der Spiegel on Saturday.
Ironically, the more we think about it, the more it seems likely the UBS was not posturing when it predicted a Greek CDS trigger to take place in March. Because this may be precisely what will happen.
In that case, step as far away from all moving ventilator blades and fans as possible. Because it is about to get real.