Vulture Funds profit from Greek Misery

As EU negotiations recommence in Greece, debt campaigners condemn ‘speculators who are gambling with the lives of Greece’s people’  

As EU negotiations begin [1] in Athens to hammer out a bail-out package, there is mounting evidence that speculative hedge funds are playing a role in preventing a deal. Debt campaigners are calling for a crack down on the activities of these ‘vulture funds’ as part of a much wider programme of debt cancellation for Greece.

Around €70 billion of Greek debt is believed to be held by investment funds – pension funds, sovereign wealth funds and hedge funds, many based in London – with another €55 billion held by European banks and insurance companies. There is mounting evidence that some of these investment funds have bought crisis-hit Greek debt cheaply in order to be able to force full payouts by desperate Greek politicians, or to cash in on credit default swaps if they force the country into default. Recent estimates have suggested that speculators could account for as much as €50 billion of Greek debt, and that companies have bought debt at a price suggesting a 75% chance of default.[2]

Nick Dearden of Jubilee Debt Campaign said:

“When we won a law to protect highly impoverished countries against the activities of vulture funds last year, we warned the problem was much broader. The sight of vultures swirling above Athens proves that vulture activity is neither marginal nor helpful to the functioning of the global economy. We need to crack down on this activity if the lives of millions of people are not to be decided by a handful of super-rich speculators.

“The Greek economy has been destroyed [3] and it is shocking to see the vultures diving in for the remaining pickings. It is imperative for the whole world, that Greece and other debt-laden countries demand and receive broad debt cancellation, combined with strict regulations on the activities of vultures.”

A tranche of Greek bonds are due to mature on 20 March. If Greece is not able to negotiate a deal by this date, it will default on this payment. Vulture funds could profit in a number of ways:

  • If most creditors accept a write-down the funds which hold out will not need to accept any reduction in the value of the debt, and they can be paid in full
  • If European politicians become desperate for a deal then bailout funds might be given anyway, allowing Greece to continue paying vulture funds off, essentially with European taxpayer money.
  • If all else fails, Greece could be forced into a default by 20 March, in which case the funds get paid out on their credit default swaps, which act like a sort of gamble that a country will default.

ENDS

Notes

[1] The European Union has told Greece that another bail-out will only go ahead if Greece can persuade private sector holders of Greek debt to accept a voluntary reduction in their claims on the country. They are looking to a 50% reduction, although the International Monetary Fund has been clear that even this reduction will not be nearly enough this late in the day.

[2] Reports from:

Der Spiegel ‘Doubts Grow over Greek Debt Restructuring’, by Sven Böll, Martin Hesse and Julia Amalia Heyer, 9 January 2012

Bloomberg  ‘Hedge Funds Try to Profit From Greece Debt Swap’, by Jesse Westbrook and Julie Cruz , 12 January 2012

Reuters ‘Hedge funds lock horns with IMF on Greek debt’ 10 January  2012

[3] Greek unemployment has reached nearly 19% – up 5% in just 12 months and expected to rise to 21% this year. The Greek economy was supposed to contract by 3% this year – in fact it shrunk by just under 6%, with another 6.5% expected this year. Health specialists are now warning of a ‘humanitarian crisis’ as companies demand up-front payments for deliveries of medical supplies.

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