Greece’s efforts to reduce indebtedness by repurchasing its own bonds won’t be a “resounding success” because hedge funds that hold as much as 22 billion euros ($28.6 billion) of debt lack incentives to participate, according to analysts at Nomura Holdings Inc.
Greece, which is scheduled to unveil details next week of a plan to buy bonds with a face value of 62 billion euros, probably won’t offer more than the 28.1 cents on the euro that the bonds closed at on Nov. 23, euro finance ministers said Nov. 27. With bonds now trading higher, hedge funds will seek a higher price, Nomura’s Dimitris Drakopoulos and Lefteris Farmakis wrote in a report today.
“The success of the buyback depends primarily on the participation rate of hedge funds,” the London-based analysts said in the report. “The rational investor will hold out.”
Hedge funds have been buying up discounted Greek government bonds after the nation restructured its debt in March as part of an effort to stave off economic collapse and an exit from the 17-nation euro bloc. The buyback approved this week is part of a package of measures to further reduce Greece’s debt in exchange for another round of bailout funds.
Hedge funds that hold Greek bonds include Dan Loeb’s Third Point LLC and Louis Bacon’s Moore Capital Management LLC, according to letters to investors and a person with knowledge of the matter who asked not to be identified because the firms are private.
Third Point, which manages $9 billion, bought Greek bonds in July and August, determining that European Central Bank President Mario Draghi’s pledge to defend the euro made an exit from the currency bloc unlikely, according to an October note to investors. Greek debt was the hedge fund’s most profitable investment in October, the firm said in a statement.
Third Point spokeswoman Elissa Doyle didn’t return a phone call or e-mail seeking comment. Shawn Pattison, a spokesman for Moore, declined to comment.
The measures agreed to in Brussels this week are designed to bring Greece’s debt burden down to 124 percent of gross domestic product in 2020 from the 190 percent it’s projected to reach in 2014. Bond holders include Greek banks, pension funds and European Union lenders.
The Nomura analysts predicted that about 30 percent of hedge funds holding Greek bonds will participate in the buyback. Firms may sell to either book gains or to cut their holdings from a “risk management perspective,” because they will become a bigger proportion of the market once the bond repurchase goes through, the analysts said.
“We believe the buyback will go through, but it won’t be a resounding success,” the analysts said.