Hedge Funds Now Hold Future Of Europe Hostage

Tyler Durden's picture


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.

Your rating: None

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 01/10/2012 - 15:53 | 2051425 Stoploss
Stoploss's picture

ZH on fire today!!

Tue, 01/10/2012 - 16:20 | 2051532 eureka
eureka's picture

I see a day not far ahead when Hedge Fund Heads lie blood drenched on the ground.

Tue, 01/10/2012 - 17:12 | 2051703 Popo
Popo's picture

$20 Billion?  It's been a while since I saw a number that small on ZH.   Doesn't seem like much of a hostage drama imho...

Tue, 01/10/2012 - 17:27 | 2051760 Kick_the_Kan
Kick_the_Kan's picture

I'll believe the triggering of Greek CDSs when I see it....the powers that be can change the rules to suit their needs

Tue, 01/10/2012 - 17:47 | 2051830 Ghordius
Ghordius's picture

I hope not...

Someone really, really loves CDS, eh, Tyler?
Outlaw that hideous stuff...

Tue, 01/10/2012 - 18:52 | 2052061 gmrpeabody
gmrpeabody's picture

A mere $20B to keep the dominos standing...? Chicken feed!

Wed, 01/11/2012 - 08:13 | 2053847 jeff montanye
jeff montanye's picture

but if not, as the snake said to the frog, you knew i was a snake when you let me climb on your back.

Tue, 01/10/2012 - 22:04 | 2052758 In Fed We Trust
In Fed We Trust's picture

Question for Tyler ,

I rembered reading in "War Cycles Peace Cycles"

That euro s are actually US dollars floating in Europe.

Euros are dollars?

Wouldnt that make the ECB the same as the Fed?

One bank, 2 books?

Wed, 01/11/2012 - 08:11 | 2053846 jeff montanye
jeff montanye's picture

could you mean "eurodollars"  http://en.wikipedia.org/wiki/Eurodollar  rather than "euros"  http://en.wikipedia.org/wiki/Euro ?

Tue, 01/10/2012 - 19:14 | 2052115 midtowng
midtowng's picture

F*ck hedge funds. I hope they choke on their money.

Tue, 01/10/2012 - 20:21 | 2052379 SixFeetFromTheHedge
SixFeetFromTheHedge's picture

0hedge is a hedgefund as well.

Tue, 01/10/2012 - 21:17 | 2052581 stocktivity
stocktivity's picture

Benny will not let a mere $20 billion shortfall dump the EU. He can print it out of thin air and loan it to the ECB overnight.

Tue, 01/10/2012 - 22:40 | 2052909 Buck Johnson
Buck Johnson's picture

What they are afraid of is one or two holdouts going to the courts or institutions that call the Credit Event and having them say it's a credit event and if not why.  Because if they call it a credit event, then all bets are off and whatever money given to Greece in the new truanche and whatever deal that was made with the other bond holders is null and void.  And all Greek debt is in default and the 278 billion or more I think in bond debt will have to be paid out via the insurers who insured the bonds.  And if they say that this isn't an even, then it opens them up to massive litigation when others start saying that you called us an event when it shouldn't have etc. etc.. 

They want this to be done under the tables but everyone is watching.

Tue, 01/10/2012 - 15:54 | 2051430 Ahmeexnal
Ahmeexnal's picture

Time for the sociopath euro-oligarchs to burn.

Tue, 01/10/2012 - 16:06 | 2051479 kaiten
kaiten's picture

Time for you to start treating your europhobia.

Tue, 01/10/2012 - 16:16 | 2051517 Michael
Michael's picture

Is this a picture of Mitt Romney or John Huntsman, I can't tell?


Tue, 01/10/2012 - 15:55 | 2051437 Jason T
Jason T's picture

Free market capitalism ..bitches

Tue, 01/10/2012 - 16:52 | 2051621 Mactheknife
Mactheknife's picture

You know what they say about "he who laughs last", I'm laughing my ass off.

Tue, 01/10/2012 - 15:57 | 2051447 Irish66
Irish66's picture

$20 billion US taxpayer nuisance, seems low 

Tue, 01/10/2012 - 16:07 | 2051487 NotApplicable
NotApplicable's picture

Well, that's before fees.

Tue, 01/10/2012 - 17:33 | 2051780 Ropingdown
Ropingdown's picture

Well then, they should have simply said "40 billion" up front.

Tue, 01/10/2012 - 15:58 | 2051450 bankofvol
bankofvol's picture

Hedge funds strategy in this negotiation and why Greece will fail to get a deal was itemized on Jan 2nd: http://qeurope.blogspot.com/2012/01/why-greek-haircut-negotiation-might....

Tue, 01/10/2012 - 15:58 | 2051452 Vincent Vega
Vincent Vega's picture

"about $20B to remove the nusiance factor".  Once upon a time that was a lot of money. Today it's just a few key strokes.

Tue, 01/10/2012 - 17:06 | 2051676 Blank Reg
Blank Reg's picture

Bernanke's first dump of the day is bigger than $20B!

Tue, 01/10/2012 - 17:23 | 2051749 Apocalicious
Apocalicious's picture

Yeah but $20B here, $20B there - pretty soon you're talking real money...

Tue, 01/10/2012 - 15:58 | 2051453 Buckaroo Banzai
Buckaroo Banzai's picture

How about Greece defaults, and no one ever lends them money again? EVER.

What if governments couldn't go into debt? What if government borrowing (or lending to governments) was punishable by death?

OH NOES! Can't let that happen! Otherwise how would bankers control "sovereign" nations!

Tue, 01/10/2012 - 16:26 | 2051554 GeneMarchbanks
GeneMarchbanks's picture

Bullshit. Any decent collateral (gold, productive industry) can be used to enter an actual marketplace to find creditors. I can't imagine that without the right amount of Au backed bonds China wouldn't lend.

Tue, 01/10/2012 - 17:04 | 2051668 falak pema
falak pema's picture

the greek oligarchs have 200 B sitting in offshore accounts in Swiss banks while the people are burnt at the stake. This is a criminal scam.

Tue, 01/10/2012 - 19:51 | 2052258 smiler03
smiler03's picture

And your evidence is where?  

Wed, 01/11/2012 - 05:56 | 2053734 falak pema
falak pema's picture

you don't read the international press, I'm not here to educate you in detail. Go read the Geneva press. Any news paper in Swiss region. All the details are there. As in the greek press...Wake up. As in ZH and on the US internet. 

Tue, 01/10/2012 - 21:49 | 2052704 In Fed We Trust
In Fed We Trust's picture

Smells like.....


Tue, 01/10/2012 - 16:01 | 2051458 GeneMarchbanks
GeneMarchbanks's picture

It has been 'about to get real' for a good two years now. HFs will clearly have to do more than play extortionist like the rest.

Tue, 01/10/2012 - 16:02 | 2051464 Sudden Debt
Sudden Debt's picture

And still the lemmings believe that our leaders are competent, smart, honest....

Tue, 01/10/2012 - 16:06 | 2051482 Sofa King
Sofa King's picture

Haven't we been through this discussion before.  No one will get paid on CDS triggers, because they are a moving target that can not be allowed to be triggered.  Mainly because there is not enough money in the world to pay out all the claims.  When you insure the same 10 dollars to 100 different people, it adds up quickly.  If there anyone outh there that has money with Hedge Funds who have positioned themselves for a payday on CDS triggers, get your cash before you get MF Globaled.

Tue, 01/10/2012 - 16:16 | 2051520 Tyler Durden
Tyler Durden's picture

Triggering of CDS will result in absolutely no cash payments as CDS will settle at already insane prices, which have been variation margined to death. In other words, the cash flow has already taken place. What will be impacted, is the ECB, which will not be able to negotiate its Greek holdings at par if there is a CDS trigger determination, and its "capital" will be impaired: something which otherwise would destroy its credibility. Although, in this case it has none to begin with, so nobody really knows what will happen.

Tue, 01/10/2012 - 16:26 | 2051555 Sofa King
Sofa King's picture


Tue, 01/10/2012 - 17:00 | 2051649 falak pema
falak pema's picture

Don't be blinded by technicalities, this is a broken market and pure power play by people desperate not to lose their ponzi ante and who are prepared to bring the world down if thet don't get paid. Agememnon is alive and well. All that haunts his dreams is that Gazprom or Petrochina will be bigger T-REX or top dog than him. That's all that counts in the demented minds of the TBTF Oligarchs. 

Tue, 01/10/2012 - 17:51 | 2051852 Ghordius
Ghordius's picture

Which makes outlawing CDSs a priority
Either de jure or de facto

Tue, 01/10/2012 - 21:57 | 2052723 In Fed We Trust
In Fed We Trust's picture

Yes you have done it Sherlock.

Weapons of mass Destruction.
Warren buffet already said so.
The new laws are in place to backfire on their makers.

Now we just need to convince the military , the bankers are the terrorists.
Jail the bankers.

Wed, 01/11/2012 - 07:45 | 2053810 Archduke
Archduke's picture

I like the european variant: moving CDS to a listed market with central clearing.


Tue, 01/10/2012 - 17:58 | 2051879 CrashisOptimistic
CrashisOptimistic's picture

I seem to recall a conversation, Tyler, between two people bearing a startling resemblance to you and me arguing . . . .

It's All About The Swaps.


Tue, 01/10/2012 - 16:17 | 2051522 GeneMarchbanks
GeneMarchbanks's picture

Put it this way: as long as you have agencies/commissions determining the 'triggers' of an event then that simply means it's open to interpretation, which means that none of this is objective and unrigged in any way shape or form.

Tue, 01/10/2012 - 16:29 | 2051564 slaughterer
slaughterer's picture

Has Kyle Bass already sold his Greek CDSs?

Tue, 01/10/2012 - 16:38 | 2051583 ucsbcanuck
ucsbcanuck's picture

he said he was out of Greece during the BBC Hardtalk interview

Tue, 01/10/2012 - 16:09 | 2051491 Chupacabra-322
Chupacabra-322's picture

The Banker.


Chilling to say the least. 

Tue, 01/10/2012 - 16:09 | 2051495 treemagnet
treemagnet's picture

It'll never happen.  They'll just come up with another plan to address a prior plan that allows for plans that fail to live up to the expectations of "the plan".  The ponzi lives on.

Tue, 01/10/2012 - 16:18 | 2051528 AldoHux_IV
AldoHux_IV's picture

The problem with central planning morons and their idiotic policies: it leads to a situation that doesn't solve the initial problem and has created another one. In this case, whether the hedge funds get more say or not in the restructuring and subsequent CDS triggering event is now more important than the concept that is continuing to be drowned out in the idiocy: more debt and technical loopholes will not allow the insolvency of periphery countries to go away and more importantly the current euro system is a perverse one in that it allows broke nations to purchase goods they don't need on credit.

The system is no longer zero-sum, but just plain negative as no one is really a winner in the end.

Tue, 01/10/2012 - 16:59 | 2051647 Urban Redneck
Urban Redneck's picture

Given the revolving door between the finance industry and the State on both sides of the Atlantic, you would think at a few of the idiots on the State side right now could have explained to their co-workers how a distressed asset (debt) fund operates, or do they not get overtime pay for that? 

Tue, 01/10/2012 - 16:20 | 2051536 LeBalance
LeBalance's picture

Hi, Mr Hedgie!

Is your wife safe?

How are the kiddies?

You eating enough lately?

Damn shame if anything were to happen to you or to the family.

Damn shame.

Keep buying our paper.

Nice, hedgie!

Tue, 01/10/2012 - 16:25 | 2051553 dracos_ghost
dracos_ghost's picture

Yup. It seems that they could easily be considered "Financial Terrorists" and be subject to haircuts in the Biblical sense.

Do NOT follow this link or you will be banned from the site!