One of the most prominent hedge funds holding Greek bonds has threatened legal action against officials negotiating the country’s debt restructuring if losses are too deep, raising a hurdle to euro zone leaders’ hopes of quickly reducing the country’s debt levels.
Madrid-based Vega Asset Management, an original member of a steering committee for bondholder negotiators, wrote to fellow investors this month to say that it would consider suing if Greece insisted on writedowns of more than half the net present value of the debt.
Vega believes that, given the current position of the official sector, a voluntary exchange that implies a NPV loss of 50 percent or less is not now a likely outcome,” Jesús Sáa Requejo, a senior Vega executive, wrote in the letter on December 7. “Vega needs to start considering all available legal options to refuse and challenge any exchange that implies a NPV loss of more than 50 percent.”
Vega, which has resigned from the steering committee, declined to comment.
The Greek bond deal is the centrepiece of a 130 billion euros second Greek bail-out negotiated at an October summit in Brussels. Bondholders agreed to take a 50 percent “haircut” on the face value of their bonds, which officials estimated would knock about 100 billion euros off Greece’s 350 billion euros debt pile.
European leaders had hoped to complete the deal by the year’s end through a bond swap, where debt holders exchange their holdings for new bonds worth less. Greece is facing a bond repayment of 14.4 billion euros on March 20 and officials are pushing to get a deal done well in advance so that Athens did not have to pay the full amount.
But the deal’s details were left open and bondholder representatives said the two sides remained far apart on financial specifics. Despite the agreed 50 percent nominal haircut, the long-term value of the new bonds can change significantly by adjusting their interest rates.
Evangelos Venizelos, Greek finance minister, said this week that a deal was close, and two top Greek bankers briefed on the talks said Athens had agreed to allow the new bonds be issued under British law – a key bondholder demand, making it more difficult for Greece to force more losses on investors.
In addition, bondholders won concessions that the new bonds would be on an equal footing with new European Union bail-out loans, meaning any future default would hit euro zone governments just as hard as private investors.
But people close to private bondholders said the two sides were still far apart on the interest rate – known as a coupon – on the new 30-year bonds.
Vega is thought to have been upset by the negotiating approach of Greece and international lenders, including the EU and International Monetary Fund. According to one participant, at meetings Vega complained about the refusal of the European Central Bank to take any losses on its holdings or for Greek banks – in effect wards of the state – to accept write downs.
The debt swap is expected to offer private bondholders a cash payment equal to 15 percent of current holdings, plus new 30-year bonds worth 35 percent of the current bonds’ face value. The coupon is expected to end up between 4.5-5.5 percent, one banker said, higher than the 4 percent projected by the IMF.
The IMF has warned that without “near-universal” participation by private bondholders, getting Greek debt down to sustainable levels might be impossible, making Vega’s stance particularly problematic.
To deal with holdouts, Greece is weighing introducing collective action clauses into domestic bond laws, which would allow Athens to unilaterally impose haircuts on holdouts if a certain percentage of investors – perhaps 70-75 percent – agreed to them.
?Standard & Poor’s cut Hungary’s long-term credit rating by a notch to BB+ on Wednesday, citing unpredictable government policies, and said there was a one-in-three possibility of another downgrade in the coming year, Reuters reports.
The ratings agency said changes to the Hungarian constitution, central bank and constitutional court had raised questions about the predictability and credibility of government policy and complicated the investment environment. Moody’s downgraded Hungary to junk status in November.
“In our view, this is likely to have a negative impact on investment and fiscal planning, which we believe will continue to weigh on Hungary’s medium-term growth prospects,” S&P said