Hedge funds have been known to use hardball tactics to make money. Now they have come up with a new one: suing Greece in a human rights court to make good on its bond payments.
The novel approach would have the funds arguing in the European Court of Human Rights that Greece had violated bondholder rights, though that could be a multiyear project with no guarantee of a payoff. And it would not be likely to produce sympathy for these funds, which many blame for the lack of progress so far in the negotiations over restructuring Greece?s debts.
The tactic has emerged in conversations with lawyers and hedge funds as it became clear that Greece was considering passing legislation to force all private bondholders to take losses, while exempting the European Central Bank, which is the largest institutional holder of Greek bonds with 50 billion euros or so.
Legal experts suggest that the investors may have a case because if Greece changes the terms of its bonds so that investors receive less than they are owed, that could be viewed as a property rights violation ? and in Europe, property rights are human rights.
The bond restructuring is a critical element for Greece to receive its latest bailout from the international community. As part of that 130 billion euro ($165.5 billion) rescue, Greece is looking to cut its debt by 100 billion euros through 2014 by forcing its bankers to accept a 50% loss on new bonds that they receive in a debt exchange.
According to a senior government official involved in the negotiations, Greece will present an offer to creditors this week that includes an interest rate or coupon on new bonds received in exchange for the old bonds that is less than the 4%private creditors have been pushing for ? and they will be forced to accept it whether they like it or not.
?This is crunch time for us. The time for niceties has expired,? said the person, who was not authorised to talk publicly. ?These guys will have to accept everything.?
The surprise collapse last week of the talks in Athens raised the prospect that Greece might not receive a crucial 30 billion euro payment and might miss a make-or-break 14.5 billion euro bond payment on March 20 ? throwing the country into default and jeopardising its membership in the euro zone.
Talks between the two sides picked back up on Wednesday evening in Athens when Charles Dallara of the Institute of International Finance, who represents private sector bondholders, met with prime minister Lucas Papademos of Greece and his deputies.
While both sides have tried to adopt a conciliatory tone, the threat of a disorderly default and the spread of contagion to other vulnerable countries like Portugal remains pronounced.
?In my opinion, it is unlikely that this is the last restructuring we go through in Europe,? said Hans Humes, a veteran of numerous debt restructurings and the president and chief executive of Greylock Capital, the only hedge fund on the private sector steering committee, which is taking the lead in the Greek negotiations.
?The private sector has come a long way. We hope that the other parties agree that it is more constructive to reach a voluntary agreement than the alternative.?
At the root of the dispute is a growing insistence on the part of Germany and the International Monetary Fund that as Greece?s economy continues to collapse, its debt ? now about 140% of its gross domestic product ? needs to be reduced as rapidly as possible.