Greek Bonds Monkeyhammered As Hedge Funds Slash Hands Catching Falling Knives

Submitted by Tyler Durden on 05/07/2012 11:02 -0400

About two years ago the Norwegian sovereign wealth fund did something truly remarkable: it invested for infinity: "Norway, which has amassed the world’s second-biggest sovereign wealth fund, says Greece won’t default on its debts. The Nordic nation’s $450 billion Government Pension Fund Global has stocked up on Greek debt, as well as bonds of Spain, Italy and Portugal. Finance Minister Sigbjoern Johnsen says he backs the strategy, which contributed to a 3.4 percent loss on European fixed income in the second quarter, compared with gains on bonds in Asia and the Americas. Norway says its long-term perspective will protect it from losses. “One could say we are investing for infinity,” Johnsen said." Well, we all know how the experiment ended: "Norway Sovereign Wealth Fund Purges All Insolvent Eurozone Debt Holdings." So much for infinity. But that has not stopped others to boldly catch falling knives where so many other have tried to catch falling knives before, and failed. Enter Greylock Capital and various other hedge funds who are positive they have rediscovered the wheel.
From the NYT:

As Greece girds for an election on Sunday that top politicians warn could ultimately force the countryto leave the euro zone, some risk-happy investors have adopted an improbable rallying cry: buy Greek bonds now. Among counterintuitive bets, few in Europe match this one.

The common wisdom holds that the new Greek government, whatever its composition, will be unable to force another round of public spending cuts on its people. That could prompt Greece to leave the euro currency union and default on its debt. But the contrarians, who are mainly distressed-debt experts, see a buying opportunity. They favorably compare the junklike 21 percent yields on Greek bonds to the much lower returns, but comparable risks, on bonds of international renegades like Venezuela and Argentina, which now trade in the 11 to 13 percent range.

"This is the trade of the year," said Hans Humes, president of Greylock Capital, a New York-based hedge fund. Greylock is actively buying the debt at prices that have ranged from 19 to 25 cents on the dollar. "It's a no-brainer," Mr. Humes said.

Investors like Mr. Humes are betting that a new Greek government -- even if it is a coalition that includes unruly splinter parties -- will have to accept demands from Europe and the International Monetary Fund that the country adopt yet another round of to-the-bone spending cuts, to secure the money it needs to survive and make good on its debts.

Bond traders say that others now doubling down on Greece include Banco BTG Pactuel, the Brazilian investment bank; Finisterre Capital, a London-based fund company that specializes in emerging markets and, in particular, Brevan Howard, one of Europe's largest hedge funds.

Mr. Humes was a member of the steering committee that negotiated the deal in March that erased 100 billion euros from Greece's still-staggering debt load, but left investors like himself with eye-watering losses. Even after that bailout deal, Greek government debt is 160 percent of its gross domestic product -- still the highest level in Europe.

But instead of selling the revamped bonds as almost certain to fail, the way many investors have done, Mr. Humes has been aggressively adding to his position.

"Greece will not default on the private sector this time around," Mr. Humes predicted.

"The politics are shambolic and the recession is massive," said Alex Garrard, a senior debt trader for BTG Pactuel in London. "But in the end, Europe cannot walk away from Greece."

Um, distressed bond expert guys - the bonds you should have bought are the old UK-law bonds which may return par, when one piggybacks on the Norwegian side in some European tribunal which is about to sue the Greek anarchy into oblivion: at least you had some covenant cover.
Buying into the new bonds which have ZERO creditor protection means the probability of a zero recovery is not really rocket science.
But yes - "no brainer" sure is better than "investing for infinity." However, at least as of this morning, considering the unthinkable is close to happening, and the 'Greek Bond' bullish thesis is evaporating in a puff of smoke, resulting in Greek bonds pummeled down by almost 20%, the no-brainer description is most applicable to those who once again boldly ventured to catch falling knives where so many have done before, into what is now the world's biggest economic depression, maybe in history. And what all these experts fail to recognize is that the New Greek bonds are essentially primed by secured debt that is at least 177% of Greek GDP. Which means in a downside case the recovery value, when all Greek assets are sold for scrap, the bonds will recover, oh, about -77%.
Sold to you.