There will be a final attempt today – when a group representing Greece's private sector bondholders meets senior ministers in Athens – to negotiate a writedown of the value of the country's debt ahead of a crucial bond repayment deadline next month.
Sources familiar with the talks, which collapsed at the end of last week, have said that a number of hedge funds are holding up the restructuring deal to ensure that they make a fat profit, after snapping up Greek bonds at distressed prices.
Greece's official backers – European governments and the International Monetary Fund – have said they will not deliver the next tranche of bailout funds that Athens needs to redeem €14.4bn (£12bn) in maturing bonds on 20 March unless a deal to cut Greece's €355bn debt pile by €100bn is concluded by the end of the month. Without those bailout funds, Athens will be forced into a disorderly default, which could plunge the eurozone into further financial chaos and possibly prompt Greece's exit from the single currency.
"It's very serious," said market analyst Nicholas Spiro of Spiro Sovereign Strategy. "The notion that a disorderly default by Greece can be ring-fenced is wearing thin and the markets don't believe it." Yet fears have grown in recent weeks that the hedge funds that are blocking the deal – which have been identified as including Vega Asset Management, Och Ziff, York Capital, GreyLock Asset Management and Marathon Asset Management – do not consider the prospect of a disorderly default by Athens as a financial incentive to allow a voluntary writedown deal to proceed.
This is because these funds are believed to have purchased insurance policies on their holdings of Greek bonds, known as Credit Default Swaps (CDS). If Athens fails to pay its maturing debts in March, that would trigger large CDS payouts to these funds from the large financial firms that sold them the insurance. Charles Dallara, the managing director of the Institute of International Finance (IIF), and Jean Lemierre of the French bank BNP Paribas, have been negotiating on behalf of the private sector bondholders. Last night Mr Dallara flew from Washington to Athens and talks will recommence this afternoon.
Negotiations broke down because agreement could not be reached about the size of the "coupon", or regular payment, on the new discounted Greek bonds that will be given to investors in exchange for their old investments.
The International Monetary Fund, which has contributed to the Greek bailout, is reported to have been pushing for an annual coupon of only 2 per cent, which could reduce the long-term value of the new bonds by up to 75 per cent. Germany, the biggest single contributor to the eurozone's bailout fund, has also been pushing for a low coupon.
A spokesman for the IIF indicated that a small number of hedge funds would not be allowed to hold the talks hostage and that if a sufficient number of bondholders agreed on the size of the coupon, the deal would be done.
"There is a need to get a critical mass of bondholders to participate. That is always the aim of negotiators. There will always be a few holdouts," he said.
However, a hedge fund source denied that the behaviour of small investment funds was frustrating a voluntary deal – and possibly even forcing a default – arguing that the voluntary basis of the restructuring deal being pushed by the IIF and European leaders was "crony banking". "Who will lose out if the insurance is paid out?" he said.
"The two biggest issuers are Goldman Sachs and AIG. They are effectively being given a bailout by not allowing Greek debt to default. Seven Goldman Sachs ex-employees are in European Union governments. This is crony banking at its worst."
The pressure on eurozone investors increased when the credit rating agency Fitch said it would consider Greece to have defaulted even if it concluded a voluntary writedown deal.
"It clearly is a default, however they try to spin it" said Edward Parker, managing director of Fitch's Sovereign and Supranational Group in Europe.
No deal: The hedge funds blocking Greek bailout
York Capital Management
The group, which is housed above an Apple store in New York, has $14bn (£9bn) in assets. It was founded in 1991 and is part-owned by the Swiss banking group Credit Suisse. Founder and senior managing director Jamie Dinan has a reported net worth of about $1.2bn.
Marathon Asset Management
Another New York fund, Marathon describes its "core competency" as "distressed and situational investing". The 14-year-old, $10bn firm, founded by CEO Bruce Richards, is a member of the private sector creditor-investor committee, which is involved in protracted negotiations with the Greek government.
Och-Ziff
One of the largest hedge funds in the world, it manages about $28.4bn for its clients. Listed on the New York Stock Exchange in 2007, the fund was founded in 1994 by Daniel Och with support from the Ziff family. Mr Och spent 11 years at Goldman Sachs before forming the fund, a joint owner of the Peacocks retail chain.
GreyLock Asset Management
GreyLock claims to have dealt with $75bn of sovereign and corporate debt since it started operations in 1998. It is run by Hans Humes, who represented around $40bn of interests while Argentina's balance books were being restructured.
Vega Asset Management
Formerly one of Europe's largest hedge funds, Vega is not as powerful as it was but still unsettled markets when it threatened to sue Greece if restructuring of its debt made losses too big for its liking. Founded in 1996 by a former trader at Banco Santander, it resigned from the steering committee and demanded that at least half of Greece's debts be repaid.
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