Hedge Funds the Winners if Greek Bailout Arrives

That, more or less, is the bet that a growing number of investors are making now as they load up on Greek government securities that mature in March. That is when Athens hopes to receive a potentially make-or-break bailout payment — a lifeline of as much as 30 billion euros ($38 billion) from the European Union and the International Monetary Fund.

Greece’s new prime minister, Lucas D. Papademos, has warned that without that infusion, his country might well default on its debts, a move that might force Greece to leave the euro currency union.

So even though Greece is already effectively bankrupt, some investors are buying and holding the country’s short-term debt — gambling that, at least in March, Athens will make a point of paying its creditors. The risks those investors run, though, include the possibility that their very actions could help prompt the European Union and I.M.F from handing Greece the March bailout installment that would enable Athens to pay make those debt payments.

With the stakes so high, investors are betting that Europe will go the extra mile to keep Greece afloat. And if the price to do that means that taxpayer funds end up bolstering the returns of a few hardy speculators — then, as far as those investors are concerned, all the better.

Such a trade-off, however, carries ramifications that go well beyond the profit motives of its participants.

For months now, Greece has desperately been trying to persuade its private sector creditors — its bondholders that are not other governments — that it is in their interest to exchange their existing Greek bonds for longer-term securities, while accepting about a 50 percent loss as part of the bargain. The negotiations are known as the private sector involvement, or P.S.I., to employ the widely used shorthand.

A few months ago such a deal looked doable, as the large European banks that held most of this private sector debt, estimated to be about 200 billion euros, recognized that it was probably a better alternative than a default by Greece, which could wipe out their holdings. Moreover, the banks were vulnerable to political pressure from their home countries, where they have a big stake in remaining on good terms with the government and important officials.

But as the talks have dragged on, many of these banks, especially big holders in France and Germany, have sold their holdings. Among the buyers have been London hedge funds and other independent investors that are now questioning why they should accept a loss — if at least in the short run Greece keeps meeting its debt payments.

And as the number of such hedge funds holding Greek debt has grown, so has their ability to forestall a restructuring private sector agreement, thus bringing them closer to being able cash in on their high-stakes gambit.

“They are calculating that Greece will not default before March,” said Mitu Gulati, a sovereign debt expert at the Duke University School of Law and a co-author of a recent paper on the dynamics of the debt restructuring process in Greece.

Mr. Gulati points out that it is these investors that are in many ways behind the delay in executing a private sector involvement. deal. “If you own a bond that matures in March and it is January, then you have every incentive to delay,” he said.

Yet private sector involvement could prove a crucial component of the set of provisions that Greece must meet to receive its next lifeline payment from Europe and the I.M.F.

The private sector loss agreement was expected to lower Greece’s borrowing expenses by as much as 100 billion euros through 2014. The agreement was also supposed to reduce Greece’s ratio of debt to gross domestic product to 120 percent by 2020, down from about 143 percent today. In short, the private sector involvement represents a crucial pillar of the 199 billion euros in financing that Greece will need from outside sources in the next three years.

The German chancellor, Angela Merkel, the most vocal proponent of requiring some sacrifice on the part of private sector lenders, has been the most forceful political leader in pushing for a resolution of the negotiations. Mrs. Merkel met with Christine Lagarde, the managing director of the I.M.F., in Berlin on Tuesday. They issued no statement, but aides said Greek debt was high on the agenda. Ms. Lagarde was then to meet Wednesday with the French president, Nicolas Sarkozy, in Paris.

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