Hedge funds tiptoe back into Greece

Πηγή: FT
By Robin Wigglesworth and Sam Jones
Oct 8 2012

Greece is a country where investors fear to tread. The economy is mired in a deepening depression, the government coffers are empty and the threat of a cataclysmic expulsion from the euro still looms over Athens.

Yet some intrepid hedge funds have tiptoed back into Greek government bonds. The country’s benchmark 10-year bond, for example, has more than doubled in price since the nadir in late May – to just above 30 cents in the euro.

Although there are still worries over Greece’s ability to meet its obligations, the current price is the highest since the restructuring of €200bn worth of private sector debt in March produced the new 10-year benchmark. The US dollar-denominated bond maturing next May has rallied to more than 50 cents in the dollar, the highest since November last year.

The rally has been largely caused by the promise of Mario Draghi, the European Central Bank president, to keep the euro area from unravelling, and has been led by hedge funds, bond traders say.

“A lot of Greek bonds have found their way into New York-based hedge funds,” says Gabriel Sterne, an economist at Exotix that covers the country. “Now that the chance of a near-term exit has faded, it’s a tolerable risk to take.”

One of the hedge funds that has recently bought Greek bonds is Third Point, managed by Dan Loeb, the activist investor who muscled himself on to Yahoo’s board this year.

In the third quarter, Third Point bought positions across Greece’s restructured bonds at an average price of about 17 cents in the euro, the fund revealed in a recent letter to investors.

In the letter, Mr Loeb said the price of the Greek bonds overstated the likelihood of a euro exit, and said that on a recent visit to Athens the hedge fund’s European analyst had “discovered several ‘green shoots’ emerging in the Greek fiscal position which also appear to be widely ignored by the broader market”.

Among the aspects giving investors comfort is that Greece’s bonds rank equally to those of the eurozone in any eventual second restructuring, and are drafted under international law. This offers better protection to creditors than the local Greek law.

This is still a risky punt. For the foreseeable future, the only way for Greece to meet its fiscal commitments is through further aid from its “troika” of lenders – the European Commission, the ECB and the International Monetary Fund – and tensions remain high.

Buying Greek bonds is fundamentally a straightforward bet that the rest of the eurozone estimates that it is better served by paying the price to keep Greece in the currency union than risking the turmoil that could be caused by an exit.

Although Greece is still locked in bruising negotiations with the troika on getting its bailout programme back on track – and unlocking a vital €31bn dollop of overdue aid – there is a growing feeling that the country could still have a future in the euro.

“Given all the work that is going into fixing the situation, seeing Greece haemorrhage and exit the eurozone doesn’t make sense,” says Shahid Ikram, chief investment officer at Aviva Investors in the UK. “If it leaves, it would have an instant domino effect, so better to pay the price to keep it in.”

This has also fed some optimism among domestic investors, who have started to return to the stock market. The Athens Stock Exchange remains 85 per cent below its 2007 peak, but it has gained more than 70 per cent since the trough in early June. One Greek company executive says the exchange is still grievously undervalued. He says the more aid that is released to the Greek government and the more funding Greek banks get from the ECB, the more it would cost the eurozone to cut Athens adrift.

“If you put aside the political rhetoric, the eurozone has stuck with us,” the executive says. “The longer we stay in, the deeper the European countries are committed to us.”

However, many investors and economists caution that the willingness of creditor countries in northern Europe to bankroll Greece is finite. They say the eurozone could cut off further aid when the more important stricken members are safely dealt with and no longer at risk from the contagion of a Greek exit.

“I wouldn’t recommend investors look at Greece at this stage,” says Alain Bokobza, head of global asset allocation at Société Générale. “The chance of a ‘Grexit’ has receded, but has the potential to rise again once Spain is under control.”