Hedge funds prosper from Greek debt
Hedge funds have made large profits from Greek debt and providing insurance to overexposed European banks, it emerged on Sunday.
France signalled that private banks were likely to help in any rescue plan for Athens.
The hedge funds have been successful as traders anticipated that over-exposed European banks would drive a wave of selling against Greece, industry insiders told the Financial Times.
“There are a group of funds, perhaps three or four, that have played this as a huge sovereign basis trade, and made a lot,” said a strategist at one of London’s biggest hedge funds.
Paulson & Co, the $32bn fund, was identified by several industry participants as one of those involved. It declined to comment on specific investments.
“We have no physical presence in Greece or any other eurozone country and 90 per cent of our portfolio is in North America,” the fund said. “There are many better informed investors, economists and government regulators to comment on European fiscal matters.”
Christine Lagarde, France’s finance minister, tried to reassure Greece over its debt crisis, telling French radio: “I have no doubt that Greece will be able to refinance itself, using means which we are currently exploring and for which we have a number of proposals. It would involve private partners or public partners or sometimes both.”
The FT reported on Saturday that Germany’s biggest banks were looking at buying Greek debt backed by guarantees from the German government. The guarantees could be provided by KfW, the state-owned development bank.
With French banks reluctant to increase their exposure to Greek debt, one option for Paris would be to issue debt guarantees through state-owned Caisse des Dépôts, the French equivalent of KfW.Greece is poised to announce a new round of austerity measures and a major bond issue this week. Olli Rehn, the European Union monetary affairs commissioner is visiting Athens for talks with the government, amid signs that the EU is crafting a multibillion euro plan to help the country fund its borrowing needs if needed.
European politicians last week stepped up attacks on hedge funds and the credit default swaps market, arguing that tougher regulation might be necessary. An estimated 95 per cent of Greek debt is held within the eurozone — most by European banks, according to Barclays research.
The hedge fund trade has worked because the funds involved were huge buyers of Greek sovereign bond default protection through the CDS market in 2009, when the price of such insurance was low, according to market participants.
Having bought insurance cheaply, the hedge funds are now in the market to buy the underlying Greek debt, the yield on which has risen significantly, or else write insurance against it for other market participants — in both instances netting out their existing positions but at a significant profit, industry insiders said.
The trade was calculated to succeed on the basis that European banks in particular would cause a blowout in Greek debt spreads and would be desperate to vacuum up CDS protection in the event of a deterioration in the Greek government’s economic standing, according to an insider at a large fund.
Greek CDS protection traded at 125bps in late October, equivalent to an annual payment of $12,500 for every $1m of protection acquired. The same CDS contract peaked early in February at 428bps, according to Bloomberg. The price on Friday closed at 364bps.
“There were a lot of smart guys who saw this coming,”"[You only had to look] at the amount of sovereign debt the ECB [European Central Bank] was pushing European banks to buy,” said the head of macro research at a large London hedge fund who declined to be named, “and you could see that the risks weren’t being considered.”
Source: The Financial Times Limited 2009