Once again, hope is pervading the media that an agreement might be reached between the Greek government and private sector investors on a debt swap, maybe even this weekend, though everyone is hobnobbing at the World Economic Forum in Davos where all sorts of things have already been said and leaked between drinks. EU Finance Commissioner Olli Rehn was the bearer of the good news: the 50% haircut, though now judged insufficient by practically everyone, appears to be in the can, and the only remaining thing left to fight over is everything else, including the trivial matters of coupon rate and maturity.
So we follow Rehn into hopefulness. We’ve been hearing forever that large vulture hedge funds, which were holding these bonds by the shipload, essentially blocked the debt swap negotiations as they were hoping to push Greece into default, which would then finally be declared a “credit event” that would trigger CDS payouts. Then more recently we read practically everywhere that almost the opposite was true, that the largest such funds actually spurned Greek bonds, and that some had gone through the unusual trouble of outright denying involvement. And now the Frankfurter Allgemeine suddenly, coup de théâtre, knows that hedge funds aren’t even at the negotiating table because their participation is so inconsequential.
It appears they have figured out that waiting for a “credit event” that would trigger a CDS payout is like waiting for Godot. So then, who are these private investors who hold about €206 billion of these crappy bonds? Well, the usual banks and financial institutions, and … German retail investors. The dumb money is moving in.
The Stuttgart bourse is Germany’s leading exchange for derivative products and bonds, including euro sovereign bonds. It handles 60% of the transactions by individual German investors. And Greek sovereign bonds are suddenly trading like there is no tomorrow. Oh, wait…. There is no tomorrow? At any rate, trading volume in these bonds has more than doubled since mid-December and is now second among all European sovereign bonds. Only German Bunds trade at a higher volume.
Bonds due in March make up 80% of the trading volume. The lure: they’re “cheap.” They go for 39 cents on the euro, down from 50 cents on the euro at the end of December, after a spike. So they’re volatile, and volatility leaves room for hope. Bonds due in May are trading below 30 cents on the euro.
These investors are throwing the dice. Left to its own devices, Greece will not be able to redeem these bonds when they mature in March or May. Whatever they’re worth afterwards will be significantly less than what they are worth now, if Argentina is any guide.
If there is an agreement with private sector bondholders, and if there is sufficient participation, and if the debt swap actually takes place, then these bonds may turn into a profitable investment. But those are big ifs. One thing is for sure, which leaves little room for hope: the smart money was selling them those bonds.