Greece Too Distressed for Distressed Funds as Default Looms

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Greece has become too distressed for distressed-debt funds.

Trading in the country’s debt and derivatives has almost stopped, even after sovereign, financial and corporate bonds dropped as much as 67 percent in a month. That’s the type of slump that would usually attract investors seeking to profit from possible defaults.

“Greece is too risky right now,” said Anthony Robertson, head of global leveraged finance including distressed investments at BlueBay Asset Management in London, which oversees about $66 billion. “Making an assessment of your recovery is difficult at the moment -- almost impossible -- because of uncertainty over currency devaluation, economic pressures, and political discord. You don’t have any insight whatsoever.”

The European Union set a Sunday deadline to reach a deal with Greece on a financial rescue in exchange for austerity and economic reforms or to end support and propel the country out of the euro. Europe has “a Grexit scenario prepared in detail,” European Commission President Jean-Claude Juncker said late Tuesday night, hours before Austrian Chancellor Werner Faymann said Greece’s Plan B is “another currency.”

Binary Situation

No government bonds traded on Greece’s electronic secondary securities market, or HDAT, in June for the first month since October 2011, according to data from the Bank of Greece and the Athens News Agency. Greece’s regulator suspended government-bond trading on June 29, though deals are possible on other platforms.

There were no trades in credit-default swaps insuring Greek debt during the week ended July 3, according to the Depository Trust & Clearing Corp. Outstanding contracts cover a net $583 million of the nation’s debt, among the lowest for countries globally and dwarfed by swaps protecting $17 billion of Italian bonds.

“There’s no muddle-through possible any longer,” said Thomas Samson, a London-based money manager at Muzinich & Co., which oversees about $25 billion. “It’s very binary. I don’t think at this stage there is much opportunity for distressed investors.”

Emerging Market

The gap between the prices at which dealers indicate they’d be willing to buy or sell securities are near records, according to data compiled by Bloomberg.

Buyers are offering 25 cents on the euro for Alpha Bank AE’s 400 million euros ($442 million) of 3.375 percent bonds due June 2017, while sellers are asking 29 cents, the data show. Those are the lowest prices since the notes were issued last year. The spread was as wide as five cents on Tuesday.

“Very few people have the guts to play politics,” said Bill Blain, a strategist at Mint Partners in London. “Who can truly guess how politicians are going to make decisions?”

Funds including Third Point, Perry Capital, Knighthead Capital Management and Monarch Alternative Capital have invested in Greece over the last two years, seeking returns in a market viewed as too risky for many traditional investors. Elissa Doyle, managing director at Third Point in New York, declined to comment on whether the fund still holds Greek debt and officials at the other firms didn’t respond to e-mails seeking comment.

Greylock Capital Management, which added to its Greek debt holdings in January and reduced its investment in April, is now watching to see how bailout talks evolve.

“Investors are waiting to get some clarity,” said Hans Humes, founder of Greylock Capital in New York. “If it remains in the euro zone, we’ll be comparing its yields to Spain or Italy. If it leaves, we’ll have to look at it as an emerging market.”