Hedge funds that hold Greek bonds and who are reluctant to voluntarily agree to the haircut being negotiated between Greece and private investors could appeal to the European Court of Human Rights, the New York Times has reported. The newspaper reports that the funds would claim that their bondholder rights are being violated but this would be a lengthy project and there would be no guarantee of a payoff at the end. “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,” writes Landon Thomas Junior of the NYT.
“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,” adds the journalist.
The hedge funds stand to make more money if a default occurs. But they stand to gain something even without a default because of the credit protection they have purchased. Credit Default Swaps, agreements that allow bondholders to collect the original value of a defaulted bond, were supposed to make holding Greek debt safer. But the prospect of the voluntary swap has rendered some of the contracts worthless, leaving investors out the initial fee they paid to purchase the agreements.
Investors holding CDS were supposed to be able to win in the Greek play no matter how it ends. Either they collect high interest rates from the Greek government, or -- if the government cannot repay the debt and has to default -- they collect the par value of the bonds they bought cheaply during the euro zone debt crisis. The cost of buying CDS on debt issued by Greece and other European countries has risen steadily since the crisis began. That means investors who bought Greek debt lately had to pay dearly to hedge their exposure. Since the debt swap is voluntary, it will not be considered a default.
There will also be far less of a return on the bonds being swapped out, since the point of the swap is to dramatically lessen the debt burden on the Greek government.
[Kathimerini English Edition & Reuters]