* Greek bond trading activity rises as crunch vote nears
* Divergent views on Greece's euro zone future fuel trade
* Worsening debt problems may prompt bond-friendly solutions
By Marius Zaharia and William James
LONDON, Nov 6 The Greek bond market is springing
back to life as hedge funds bet on whether parliament approves
more budget cuts to unlock vital foreign aid, or rejects them
and threatens a default.
New Greek bonds issued under a debt swap deal earlier this
year are trading, at best, at less than a third of their face
value. Nevertheless, this is twice their lowest value hit when
an imminent Greek departure from the euro zone seemed possible.
Buyers expect Greek lawmakers to vote on Wednesday for the
13.5 billion euros of spending cuts and tax increases in next
year's budget. As optimists they hope that one day they will be
repaid in full, or at least that the euro zone's bailout fund
will buy back their bonds at a higher price.
Sellers, however, believe parliament will vote against the
extra austerity which Greece's international lenders have made a
condition for releasing 31.5 billion euros of aid that Athens
urgently needed to avoid bankruptcy.
Together they have boosted trade sharply.
"A lot of our investors are getting involved in this story.
Some people have taken really big positions, and a very
significant proportion of hedge funds in that distressed debt
area now have a Greek position," said Gabriel Sterne, an
economist at Exotix, a broker that deals in Greek debt.
The bulk of privately-held Greek debt is now owned by hedge
funds which can take bigger risks than traditional investors
such as pension funds.
Betting on the vote is undoubtedly risky. The result is
expected to be close and with striking workers crippling the
country, members of parliament are under intense pressure to
reject inflicting another wave of misery on Greeks.
"It looks like we're going to be watching the Greek vote
live on TV again," said Sohail Malik, lead portfolio manager of
a special situations fund at ECM Asset Management which held
Greek bonds until 2011.
Malik said expectations of a Greek exit from the euro zone,
which have eased since earlier this year, could rapidly revive.
"The door is not shut on the Greek position within Europe. The
odds have clearly reduced, but these fears can come back pretty
quickly if we have an extraordinary political event this week."
The volume of benchmark Greek bonds traded over HDAT, the
trading platform operated by the Bank of Greece, has risen
steadily from 26 million euros in April to 88 million in the
first three weeks of October. This put October on track to be
the busiest month this year, according to the latest data.
The data show only part of the market because many trades
take place away from the exchange, but reveal a marked increase
in general interest in Greek bonds over the last month.
The gap between the prices at which participants will buy
and sell Greek debt, which narrows as activity picks up, is
tighter than in August. However, at 100 cents it remains around
double that on Spanish debt and 33 times that of ultra-liquid
A TIME TO SELL
Greece's chronic recession and sky-high debts have forced
Athens to seek two massive bailouts from its euro zone peers and
the IMF, and in March this year private Greek bondholders took a
nominal 53.5 percent loss on their investment.
As part of that deal, which eased Greece's huge debt burden,
old bonds were replaced with new ones. These quickly slumped
to around 14 percent of their face value, a level that is too
risky for most investors but prized by some because they could
be repaid in full for a handsome profit when the bonds mature.
Since then, prices more than doubled after a coalition
government committed to keeping Greece in the euro zone took
power in June.
London-based Adelante Asset Management achieved a 70 percent
gain on Greek debt but recently decided to sell some of its
holdings. This was due to the renewed uncertainty over the
austerity demanded by "Troika" inspectors from the European
Commission, European Central Bank and IMF.
"The reason for our sale is to protect some of our gains. We
think the market is vulnerable ahead of the key vote on the 2013
budget and structural reforms the country needs to implement as
agreed with the Troika," Adelante Chief Executive Officer Julian
Before the latest vote, profit taking has pushed prices
lower for all maturities of Greek bonds, with the 2023 bond
trading at 31.5 cents in the euro after peaking
at 34 in early October. Other maturities have lower prices.
Adelante said it would consider using the price fall as an
opportunity to buy more Greek debt if it felt the coalition had
sufficient support to force through the required measures.
BAD NEWS SIGNAL
Even if parliament approves the extra cuts and international
lenders release the aid, the severity of Greece's recession
means budget targets will be missed by two years, requiring 30
billion euros more funding.
For those willing to take a punt on Greek debt, bad news on
meeting the budget targets could signal the right time to buy.
The euro zone has little appetite to lend more cash upfront
to Greece and officials are unwilling to take losses on bailout
loans and bonds held by the ECB. Policymakers are therefore
mulling creative ways to reduce Greece's debt, which is expected
to hit 189 percent of GDP next year even after the bond swap.
One measure under consideration is using money from the
region's European Stability Mechanism (ESM), a bailout fund
established earlier this year to cope with the crisis, to buy
back Greece's debt.
That prospect is drawing the attention of those who see a
chance to buy Greek debt and profit from the presence of a
guaranteed buyer in the market.
ESM-funded buybacks could push up average prices across all
maturities of Greek debt by almost 30 percent, according to
Commerzbank. It estimates the average price of the new Greek
government bonds (GGBs) would rise from 23.5 cents in the euro
"Once it is clear that first, a deal can be reached and
second, the deal contains buy-backs, this will be conducive to a
strong performance of the new GGBs," said Commerzbank strategist
Christoph Rieger. "If you have this target (of 30 cents) in mind
it is already a compelling buy. It is hard to say whether we can
go higher because there must be a limit as to how much the ESM
could pay in a buyback."