The Greek Crisis Deepens

-- These holdouts are the ones that we MUST identify. They are the powers that be. They are the conscious and dedicated servants of evil, death and darkness. They are the ones knowingly, ruthlessly and deliberately seeking the death of all life on this planet. These are the ones we must find and drag out into the sunlight for disinfection.

Until you change the way money works... -- MCR

Greece Is in a Face-Off With Its Bond Holdouts

The battle between Greece and the vulture investors is about to begin.

CNBC,

4 April, 2012

Fresh off the largest debt restructuring in history, the Greek government is preparing to confront a small, well-financed pool of holdout investors who are refusing to swap their bonds and take a 75 percent loss.

These investors, who probably represent about 2 to 3 percent of Greece’s privately held debt, are betting that Athens and its European supporters — contrary to their public pronouncements — will prefer to pay them back in full rather than let the bonds default.

And that, analysts say, would create a dangerous precedent, not only angering the investors who took large losses last month but raising the prospect that Europe is ready to cut deals with hedge funds holding on to risky sovereign debt.

Officials involved in the debt deliberations say that Aurelius Capital Management and Elliott Associates, two well-known distressed debt funds, are among the investors contemplating a holdout strategy.

The latest round of poker with a sovereign debt twist will play out on Wednesday at 8 p.m. London time. That is when investors holding $26.8 billion worth of Greek bonds that are governed by foreign law face a deadline for deciding whether to swap their bonds for new, longer-term securities — some of which are backed by Europe’s new rescue facility — and accept a 75 percent loss. Some investors have until April 18 to decide.

The stakes may seem small compared with the 100 billion euro, or about $130 billion, restructuring of bonds governed by Greek law that was reached last month. That debt deal was part of a broader 130 billion euro bailout that saved Greece from bankruptcy.

Investment bankers and analysts guess that, in the end, the bond holdouts will represent a pool of money of about $5.5 billion — a sum that Greece, through its financial backers, could pay.

But if Greece and its European sponsors decide to redeem these bonds in full — one of the issues matures on May 15 — they will have diminished the sacrifice of the investors who agreed to the deal and given incentive to future vulture investors to pursue similar strategies with other imperiled countries in the euro zone.

Greek officials have been blunt and unflinching in their views on the matter.

“We are standing on an ethical pedestal here,” said Petros Christodoulou, the head of Greece’s debt management agency who is overseeing the mechanics of the country’s debt restructuring effort. “We speak with one voice with our official sponsors. This is as good an offer as the bondholders are ever going to get.”

For the committed holdouts, though, such talk is bluster. These funds have accumulated controlling stakes in a range of Greek bonds, the variety of which are testimony to a time when Greece and its public entities could raise sums in markets all over the world. Some bonds are denominated in Japanese yen, and issuers include the country’s near-bankrupt railroad company.

As many of these bonds are fairly small — the one that matures in May is 450 million euros — holders calculate that Greece and Europe will pay them off rather than let them default.

“The goal is minimum economic value, maximum nuisance value,” said Adam Lerrick, a sovereign debt expert at the American Enterprise Institute.

Mr. Lerrick points out that for Greece, a country that hopes to return to international bond markets in 2015, the prospect of a series of lawsuits from deep-pocketed hedge funds is unappealing.

The government aims to sell more than 40 billion euros of state-owned assets in the coming years, a difficult task even without the added threat that an aggressive hedge fund may put a lien on those assets.

The funds also take heart from a view that the International Monetary Fund has explicit guidelines that say it cannot lend money to a country that chooses to default on its obligations.

“This would create a bad precedent,” said Gabriel Sterne, an economist at Exotix, a London-based investment bank, pointing out that there is enough money in Greece’s latest bailout package to allow it to meet these obligations. “The I.M.F. might well say, ‘Pay these guys — there is money left over.’ ”

Persuading the holders of Greek foreign-law bonds was always going to be tricky. Unlike the Greek law bonds, which include clauses that allow Athens to enforce conditions on all holders after winning the approval of a majority of holders, the contracts of the 36 foreign-law bonds offer more protections for investors and hold that a separate agreement must be reached for each bond.

Last week in London, meetings for the 36 foreign-law bonds in question were held. Only 16 voted to allow Greece to initiate a so-called collective action clause that would force the terms of the swap on all investors.

The involvement of funds like Aurelius and Elliott increases the possibility of a protracted legal battle if Greece chooses not to pay. Bankers caution that even though these funds may be holding Greek debt right now, that does not mean they will sue.

Representatives for both funds declined to comment.

Aurelius, which has a size of about $2.5 billion, was founded by Mark Brodsky, a former top executive at Elliott. It has made its name by challenging debt restructuring deals like the bankruptcy of the Tribune Company and, more recently, a proposal to write down bank debt in Ireland.

Elliott, which manages $19 billion, has a much larger profile. Renowned for legal tactics that have forced governments like the Republic of Congo to pay out on debt claims, it continues to press its case against Argentina, which defaulted on its debt in 2002.

Another possible outcome, analysts say, is that the very threat of a default and a drawn-out legal wrangle may prompt Greece to give in — as other countries like Ecuador have done in similar circumstances.

“This happens all the time,” said Mitu Gulati, a sovereign debt specialist at Duke University Law School. “At some point a country just does not want the drama of being in default again.”