Greece Defaults? Greek Banks Do Close, Hedge Fund Panic?

Greece Defaults?  Greek Banks Do Close, Hedge Fund Panic?

For investors around the world looking at Greece, there was but one question Sunday: What is going to happen when the markets open?

On Sunday night, Greek Prime Minister Alexis Tsipras said in a televised address that the banks and the stock market would be closed Monday, as the government tries to avert a financial collapse.

But the question of what happens when the markets do open is particularly acute for the hedge fund investors – including luminaries like David Einhorn and John Paulson – who have collectively poured more than €10 billion ($14.4 billion) into Greek government bonds, bank stocks and other investments.

Through the weekend, Nicholas Papapolitis, a corporate lawyer here, was working around the clock comforting and cajoling his frantic hedge fund clients.

“People are freaking out,” said the 32-year-old Papapolitis, his eyes red and his voice hoarse. “They have made some really big bets on Greece.”

But there is no getting around the truth of the matter, he said. Without a deal with its European creditors, the country will default and Greek stocks and bonds will tank when the markets open.

There are not as many hedge funds in Greece as there were a year ago, when it is estimated that around 100 foreign funds were sitting on big investment stakes. Their bet was that the previous Greek government would be able to complete the arduous process of economic reform in Greece that started five years ago.

When it became clear that a radical Syriza government under Tsipras would come to power, many investors quickly turned heel, dumping their Greek government bonds and bank stocks in large numbers before and after the election.

But a brave, hardy few stayed put – about 40-50, local brokers estimate – taking the view that while the new left-wing government could hardly be described as investor friendly, it would ultimately agree to a deal with Europe. It would be a bumpy ride for sure, but for those taking the long view that Greece would remain in the eurozone, holding onto their investments as opposed to selling them in a panic seemed the better course of action.

For now, at least, that seems to be a terrible misjudgment, especially if Greece defaults and leaves the euro.

Most of the hedge fund money in Greece is invested in about 30 billion euros of freshly minted Greek government debt securities that emerged from the 2012 restructuring of private sector bonds.

The largest investors include Japonica Partners in Rhode Island, the French investment funds H20 and Carmignac and an assortment of other hedge funds like Farallon, Fortress, York Capital, Baupost, Knighthead and Greylock Capital.

A number of hedge funds have also made big bets on Greek banks, despite their thin levels of capital and nonperforming loans of around 50 per cent of assets.  Read More:

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