* Funds eye blocking stake in small May bond
* Bingham McCutchen says advising holders of Swiss-law bond
* Strategy may be trickier than other recent cases
By Sarah White and Sophie Sassard
LONDON, March 7 (Reuters) - Some hedge funds are refusing to join Greece's bond swap, threatening legal action if the government does not come up with a better offer and complicating efforts to restructure the country's debt.
Greece's private creditors have until Thursday night to decide whether to take part in a bond swap, aimed at avoiding a disorderly default that would drag other countries further into the euro zone crisis. But several hedge funds are expected to hold out, having bought up small amounts of foreign-governed Greek bonds, estimated to be about 10 percent of the 200 billion euros being restructured.
Hedge funds alone are unlikely to derail the swap but if their strategy works and they agree a better deal it would infuriate other creditors and use up Greek resources. If not, it could drag the Greek government into a lengthy and expensive legal battle just as it needs to focus on bringing back economic growth.
"I'm aware of several investors actively considering all of their options, including litigation," said Steven Friel of Brown Rudnick, among the law firms talking to investors about their legal strategies in Greece.
The hedge funds favour the bonds governed by more investor-friendly foreign jurisdictions which limit a country's ability to impose losses. The Greek legal system is seen as likely to be more sympathetic to the government.
Bingham McCutchen, another law firm, said on Monday it was advising holders of a Greek 650 million Swiss franc ($707.33 million) bond. Bondholders holding a "material portion" of the bonds had grouped together and were exploring ways to "address (their) concerns and to protect the rights of holders", Bingham said.
Hedge funds may now hold a quarter of the Swiss franc bonds and of another small 450 million euro bond falling due in May, which is enough to block the government imposing a loss, several bankers and lawyers say.
"It is quite clear that those who hold that bond are not well disposed to participate," said a source close to the Greek debt negotiations.
They are hoping the government may then prefer to reach a settlement before May than default on the payment altogether despite Greek officials saying no better offer will be forthcoming. If there is no settlement they may pursue legal avenues that were successfully used against other countries in default such as Argentina.
Friel at Brown Rudnick said the documents accompanying Greece's bond swap offer left room for "bilateral negotiations" between Greece and holdout creditors, meaning the country has given itself leeway to negotiate despite its tough stance now.
Under these treaties, investors can fight losses being imposed on them in international courts, like they did in the case of Argentina.
However, the Greek case might be more complicated than Argentina, putting some investors off.
One hedge fund that had earlier told Reuters it was considering legal options said it had now decided to agree to the swap, even though that would mean a small loss.
Greece has bilateral investment treaties with 39 countries but many of these are impractical, said Michael Nolan, a litigation partner at Milbank Tweed Hadley & McCloy in Washington.
It has treaties with countries such as Syria and Vietnam, with the only relevant country being Germany - where the treaty is so ancient it does not have the necessary arbitration provisions, he said.
Law suits over sovereign debt can also take years. Argentina still has not settled with some creditors who held out during its debt default a decade ago.
Greece's economic recovery may also not be as certain as in Argentina's case as it cannot devalue and does not have such a strong export market to boost its coffers.
"Argentina historically has had a boom and bust economy. If you brought an international legal claim, it may be in part because you thought that, by the time the case was over, Argentina could have the money to pay an award against it," said Michael Nolan, a litigation partner at Milbank Tweed Hadley & McCloy in Washington.
"With Greece's economic situation, one has to wonder if the game is worth the candle."