DealBook: Hedge Funds Scramble to Unload Greek Debt

So much for that big fat Greek payday.

Hedge funds that in the last month or so have purchased an estimated 4 billion euros ($5.2 billion) of beaten down Greek bonds that mature on March 20 are now trying to unload their positions, according to brokers and traders.

That is because it is becoming clear to one and all that Greece — under pressure from its financial backers — is preparing to impose a broad-based haircut that would hit all investors with a loss of 50 percent or more, whether they agree to the deal or not.

The problem is that while buying the bonds over the last few months was easy, as many European banks were unloading their positions, getting out now is proving to be near impossible. Liquidity has dried up and investors are avoiding Greek paper as if it were the plague.

The poor outlook for early maturing Greek bonds was compounded on Wednesday when Christine Lagarde, managing director of the International Monetary Fund, said the public sector might have to participate in a restructuring deal with private sector creditors.

“There was a lot of volume going in, but not a lot going out,” said one broker, speaking on condition of anonymity. The broker said prices for March 2012 bonds had slipped to around 35 cents on the dollar from a range of 40 cents to 45 cents.

Starting in December, the counterintuitive, go-long Greece bet was one of the more popular pitches made to funds in New York and London.

Investment banks — Merrill Lynch was particularly aggressive in recommending the trade, investors say — argued that even though Greece was near bankrupt, those who bought the paper maturing in March could double their money when Greece received its latest bailout tranche due that month. The bulk of that tranche would be paid to bondholders to keep Greece solvent, just as was the case with past payments from the European Union and the International Monetary Fund.

Greece might well restructure its debt, brokers said, but added that was likely to happen later and would not affect the March payout.

Brokers estimate that of the 14.5 billion euros of these bonds outstanding, the largest holder is the European Central Bank, which bought these securities in 2010 at a price of around 70 cents in an early, ultimately futile attempt to boost Greece’s failing bond market. The brokers say that 4 billion to 5 billion euros of bonds are owned by hedge funds at an average cost of around 40 cents to 45 cents, with some of the larger positions being held by funds based in the United States that have large London offices.

Now, with momentum building in Europe for an agreement on a 50 percent-plus haircut to be reached before March 20 — one that would be legally binding on all holders — the smart money is not looking so smart anymore.

“It was a very binary trade,” said one hedge fund executive who listened to the pitch but took a pass. “If you got paid, you double your money in a month. But you may also look like an idiot.”

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