Back in June, which now seems like a lifetime ago, we wrote an article titled: "A Few Good Hedge Funds May Have Called The ECB's Bluff, And Hold The Future Of The EUR Hostage" in which we discussed the weakest link in the Eurozone bailout and in which we warned, rather prophetically as it turns out, "that not only is Bailout #2 in jeopardy of not passing the Greek parliament, but that 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..." Why prophetic? Because the FT has just reported that "One of the most prominent hedge funds holding Greek bonds has threatened legal action against officials negotiating the country’s debt restructuring if losses are too deep, raising a hurdle to eurozone leaders’ hopes of quickly reducing the country’s debt levels." Well, Vega may not be quite the David we envisioned but it will do. The bottom line is that the weakest link in the Eurozone rescue, precisely the one we predicted over six months ago, has now been exposed. We fully expect other "activist" funds to be buying up or have already bought up the debt of the other PIIGS, and hold the future of the Eurozone ransom for the princely sum of 1 million dollars.... Or realistically, much, much more. Oh, and so much for ISDA's carefully conceived plan of a "voluntary" restructuring - should Vega proceed to indeed sue Greece it is game over for the worst laid plan of mice and corrupt derivatives organizations.
More from the FT on what many has considered a ludicrous probability yet one which is now all too real: a lawsuit of a sovereign by
Madrid-based Vega Asset Management, an original member of a steering committee for bondholder negotiators, wrote to fellow investors this month to say that it would consider suing if Greece insisted on writedowns of more than half the net present value of the debt.
“Vega believes that, given the current position of the official sector, a voluntary exchange that implies a NPV loss of 50 per cent or less is not now a likely outcome,” Jesús Sáa Requejo, a senior Vega executive, wrote in the letter on December 7. “Vega needs to start considering all available legal options to refuse and challenge any exchange that implies a NPV loss of more than 50 per cent.”
Vega, which has resigned from the steering committee, declined to comment.
The Greek bond deal is the centrepiece of a €130bn second Greek bail-out negotiated at an October summit in Brussels. Bondholders agreed to take a 50 per cent “haircut” on the face value of their bonds, which officials estimated would knock about €100bn off Greece’s €350bn debt pile.
Vega is thought to have been upset by the negotiating approach of Greece and international lenders, including the EU and International Monetary Fund. According to one participant, at meetings Vega complained about the refusal of the European Central Bank to take any losses on its holdings or for Greek banks – in effect wards of the state – to accept write downs.
And now, past the customary several day gestation period during which the idiot market comprehends what the real risk here is, namely that of CDS triggering in serial fashion across the eurozone as the "activist sovereign investor class" emerges, it is time to hedge.