Cross posted from The Stars Hollow Gazette
On Wednesday it was reported that some greedy hedge funds are blocking the rescue of the Greek economy. The hedge funds which had bought up the distressed Greek bonds in hope of making a killing came up against the Greek agreement to reduce their debt in order to receive the next tranche of funds to stave off default:
{..} (F)ears have grown in recent weeks that the hedge funds that are blocking the deal – which have been identified as including Vega Asset Management, Och Ziff, York Capital, GreyLock Asset Management and Marathon Asset Management – do not consider the prospect of a disorderly default by Athens as a financial incentive to allow a voluntary writedown deal to proceed.
This is because these funds are believed to have purchased insurance policies on their holdings of Greek bonds, known as Credit Default Swaps (CDS). If Athens fails to pay its maturing debts in March, that would trigger large CDS payouts to these funds from the large financial firms that sold them the insurance.
There is a reason they are called hedge funds but this is more a game of “head I win, tales you lose.”
To ad insult to injury, when Greek Prime Minister Lucas Papademos told the hold out that he would ask Parliament to change the law and force them to take the interest rate cut, the greedy hedgers have come up with plan to sue the Greek government in Human Rights Court forcing them to make good on the payment:
The novel approach would have the funds arguing in the European Court of Human Rights that Greece had violated bondholder rights, though that could be a multiyear project with no guarantee of a payoff. And it would not be likely to produce sympathy for these funds, which many blame for the lack of progress so far in the negotiations over restructuring Greece’s debts.
The tactic has emerged in conversations with lawyers and hedge funds as it became clear that Greece was considering passing legislation to force all private bondholders to take losses, while exempting the European Central Bank, which is the largest institutional holder of Greek bonds with 50 billion euros or so.
Legal experts suggest that the investors may have a case because if Greece changes the terms of its bonds so that investors receive less than they are owed, that could be viewed as a property rights violation – and in Europe, property rights are human rights.
As David Dayen at FDL News Desk points out this process could take years to litigate but he also found something significant buried in the New York Times article:
It is not just the legal cudgel that investors are threatening to use. Some hedge funds have discussed among themselves the possibility of demanding a side payment, as they describe it, as a price Europe and Greece must pay if the two want the funds to participate in the agreement.
Yes, David, I agree this is extortion..Give us the money or we blow up the world.