LONDON—Greece may never be able to pay off its huge debts, but its bonds, long scorned by investors, are suddenly being gobbled up by hedge funds. After a number of investors struck gold by betting against French banks, many have turned their attention to the hot yet risky euro zone trade of the moment: buying Greek government bonds that traders say are changing hands for as little as 36 cents for each euro of face value.
The investors hope to book a fat profit on the expectation that the European Union and the International Monetary Fund will once again bail out Greece, fearing a global financial disaster if they do not.
Under the deal Greece struck in July with its banks as part of Europe’s rescue plan, a substantial portion of its existing bonds are scheduled to be swapped into new longer-term securities that could be valued at more than 70 cents to the euro.
If the deal closes in late October—assuming the latest bailout system is ratified by the parliaments of the 17 European Union countries that use the euro—those who bought the bonds recently at distressed prices might in some cases come close to doubling their money.
But what is good for hedge funds is not necessarily good for Greece.
The popularity of this trade is just the latest sign that the carefully constructed debt swapagreed to by Greece and its private sector creditors may be a much sweeter deal for investors than it is for taxpayers.
“Everyone knows this was a good deal for the banks,” said Otmar Issing, a top German economist who served on the executive board of the European Central Bank. “It will not help Greece at all.”
According to a person with direct knowledge of the debt swap, about 30 percent of the investors who are expected to participate in the exchange bought their bonds after July 21. They are not the original debt holders—mostly large European banks—but more speculative investors looking to cash in on the steep fall in Greek bond prices.
The debt swap is expected to cover about 135 billion euros ($183 billion) in existing bonds, suggesting that various hedge funds and other investors have bought as much as 40 billion euros worth of Greek debt since July 21.
The behind-the-scenes deal-making may be obscure but it helps explain why Chancellor Angela Merkel is having such a hard time persuading crucial German lawmakers to vote for the Greek bailout on Thursday.
With people like Mr. Issing arguing that banks and other creditors have not been forced to contribute a larger share of Europe’s ever-rising bailout bill, it’s no surprise that politicians are worried about a harsh public reaction to the bailout.
Mr. Issing contends that the owners of Greece’s debt should be required to take a roughly 50 percent write-down on their holdings as part of an “orderly” default that would reduce Greece’s overall debt burden, allowing it to meet its obligations without further borrowing.
Under the current deal, Greece’s debt burden would be reduced to 122 percent of gross domestic product by 2015—still leaving Greece with the highest debt load in Europe.
Speaking Tuesday at a conference in Berlin that discussed the future of the euro zone, Mr. Issing shook his head in frustration, pointing out that in light of the recent collapse in Greek bond prices, some banks might even be able to book a loss that is significantly less than the advertised 21 percent.
While not a member of the government, Mr. Issing is in many ways the leading voice of Germany’s economic establishment.
But supporters of the Greek bailout say it is too late to change the terms and that any effort to alter the equation between Athens and its creditors could scuttle the whole carefully constructed deal. They also argue that many European banks holding Greek debt, particularly those based in Greece itself, are too thinly capitalized to absorb any larger losses now.
Analysts say that further debt write-offs are likely to be delayed well into next year, after Europe has put in place a new financing system that could bolster the region’s banks.
“You need to equip yourself with sufficient firepower—then you can talk about restructuring,” said Jean Pisani-Ferry, the director of Bruegel, a nonprofit economic research organization in Brussels.
That the deal is a good one for banks should not come as a surprise.
Greece had little input in setting the transaction terms, which were largely put together by representatives from the Institute of International Finance, a trade group for global bankers whose chairman is Josef Ackermann, the departing chief executive of Deutsche Bank .
Defenders of the swap say that while it may not be ideal, it was the best deal that could be reached at the time. If hedge funds make some money along the way, they say, that is a small price to pay for securing a contribution from the private sector.
Now that analysts are actually calculating the effect of the debt swap, that contribution is looking even more modest than originally advertised. Some estimate that most participating banks will experience losses closer to 10 percent or even less on bonds that are currently trading at a discount of around 60 percent.
“It is a relatively attractive deal for the private sector,” said Cagdas Aksu, a credit analyst at Barclays Capital who has published a number of research notes on the exchange.
That was well known among policy makers. Less understood, though, is how hedge funds stand to make out if the deal is completed and they swap the bonds they bought at 40 cents and below for bonds that, depending on several variables, could be worth 60 to 80 cents.
Those speculating in Greek bonds are taking on well-documented risks, not the least of which is the possibility that the country will fail to reach a final agreement with the I.M.F. and the European Union and will not get the next portion of money needed to avoid default.
But expectations are growing that Greece has done enough to secure the 8 billion euros ($11 billion) it needs next month and that the bailout mechanism to back up a longer-term rescue plan will win approval by the end of October as well.
In that case, it will not be just officials from Washington, Brussels and Athens celebrating their success in staving off a Greek bankruptcy for a while longer. So will a lot of well-heeled hedge fund investors.