Hedge funds are combing through the small print of Greece's planned rescue deal with private creditors, readying a wave of potential litigation to squeeze a better payout from the country.
Most bondholders face an uphill battle in wringing a payment from Athens through the courts, but shrewd funds picking up specific bond issues with investor-friendly small print have a much better chance of succeeding.
This is so worrying those negotiating Greece's private sector deal that many are trying to keep the final structure of a rescue package under wraps until it is done to prevent the funds from finding a legal edge, sources close to the talks say.
Challenging countries through the courts is a well-worn hedge fund strategy -- some are still battling Argentina for payouts more than 10 years after its record-breaking default.
The closer Greece edges to a disorderly default where it imposes losses, rather than a managed one in which it agrees a deal with a majority of bondholders, the more creditors are likely to go down the legal route.
Athens is racing to cut a deal to slash its debt pile by some 100 billion euros through a voluntary bond swap that would see private creditors swallow 50 percent losses.
If a deal is not in place by mid-March, when a 14.5 billion euro bond falls due, Greece may not get the funds it needs from the European Union and other lenders to avoid a managed default.
"If the path followed (in Greece) is a non-voluntary one, there will be excessive litigation,» said Rodrigo Olivares-Caminal, a banking and finance law specialist at Queen Mary, University of London, and an expert in sovereign debt.
Madrid-based Vega Asset Management threatened it would take legal action when it quit the committee leading private creditors in talks with Athens last year, unhappy about the size of potential losses, sources said at the time.
One lawyer specializing in debt restructuring said on Tuesday he had been contacted by funds looking at legal options relating to Greece, while several funds also told Reuters they were weighing up strategies if they are forced to take losses.
Funds forced into losses as part of the bond swap or default have several avenues to bring a case, including the European Court of Human Rights or the International Center for Settlement of Investment Disputes, Olivares-Caminal said.
Hedge fund tactics range widely. Many will be keen for a deal to get done and will not sue, especially if they can profit from the difference between the level of losses imposed and the price they paid for the debt in the secondary market.
Others hope to be paid out in full if enough other private creditors -- primarily banks and insurers -- sign up to the bond swap.
If Greece can get the go-ahead from about two-thirds of private creditors, it plans to pass laws to coerce reticent bondholders, like the hedge funds, into taking losses, sources have told Reuters.
To counter this, some hedge funds are going for defensive strategies and buying up some of the 18.3 billion euros of Greek bonds that were drawn up under English or foreign law, industry and legal sources said. These would be immune from any changes to Greek law.
The English law bonds do contain so-called collective action clauses designed to force outliers into a deal -- but they state Greece would have to get 75 percent of creditors to back a deal, most likely higher than the threshold Athens would impose in domestic law bonds in its bid to get a deal done.
They also contain precise clauses that could help hedge funds sue or eke out a settlement if they are forced into an unfavorable bond swap, because they are not being treated equally to other creditors like the European Central Bank.
The English law bonds include pari passu clauses, which mean creditors have to be treated on an equal footing and could give them leverage over the ECB, which owns around 45 billion euros worth of Greek bonds bought in the secondary market.
So far the ECB has shown unwillingness to participate in the bailout, but if Greece can succeed in forcing funds to take losses, the holders of these English law bonds could argue the ECB's immunity is unfair.
One big worry is that hedge funds could buy up enough of the English law bonds to block the clauses from being triggered for specific bond issues, although none of the sources contacted by Reuters had evidence of this happening yet.
That would make an overall agreement with private creditors very hard to reach, and give hedge funds ways of resisting further deals if Greece were to default.
Suing bankrupt governments is still a risky game, however. Funds such as New York-based Elliott Management and its affiliates, which specialize in these types of tactics and have won court cases against Argentina, are still chasing the money they are owed.
That debt restructuring saga was also easier for hedge funds to play as the bulk of the bonds were under US law, limiting Argentina's influence over them.
One hope in the far tougher game that is the Greek negotiations is that Athens, keen to restore its reputation as a reliable debtor, might prefer to settle with reticent creditors than head into years of courtroom battling.
That would echo strategies employed by Ireland to deal with unhappy bondholders when it restructured the debt of its banks.
"The primary strategy is unlikely to be a court judgement after protracted litigation,» said Steven Friel, a litigation partner at Brown Rudnick.
"Bondholders are much more likely to work towards settlement, if necessary using the threat of litigation as leverage to negotiate a better deal." [Reuters]