Greek bonds double as bets on euro exit decline

Greek government bond prices doubled during the past three months as investors, including the $9 billion hedge fund Third Point LLC, bet the likelihood of the nation leaving the euro-region has diminished.

The nation?s 10-year yields are heading for a fifth monthly decline, the longest streak in seven years, as European politicians step up efforts to stem the debt crisis and after European Central Bank President Mario Draghi pledged to ?do whatever it takes? to defend the euro. Money managers at Germany?s Universal-Investment GmbH and TT-ELTA AEDAK, a Greek mutual fund company, added to their holdings in the period.

?There was too much speculation that Greece was about to leave the euro, but this has now abated,? said Spyros Politis, chief executive officer of Athens-based TT-ELTA AEDAK, which oversees 295 million euros ($380 million) of assets and owns Greek debt. ?This is causing people to be more optimistic about the prospect of Greece paying back the bonds.?

The price of Greece?s security due in February 2023 reached 32 percent of face value on Oct. 9, up from 16 percent on July 25. The yield on the securities was 18.44 percent at 9:08 a.m. London time, from as high as 31 percent on May 31.

German Chancellor Angela Merkel said Oct. 9 that she wants Greece to remain in the single currency. She made the remarks in her first trip to the country since 2007 in a bid to show support for the government of Prime Minister Antonis Samaras.

International Monetary Fund Managing Director Christine Lagarde said at a press conference in Tokyo today that the fund ?will spare no time, no effort,? to help Greece.

Illiquid Market

?The general approach in Europe has been more conciliatory,? said Luca Jellinek, head of European interest- rate strategy at Credit Agricole Corporate and Investment Bank in London. ?It?s a super high-risk investment and the market is so illiquid that any kind of buying will move the bonds up quite substantially.?

Trading in Greek government debt rose to an average of 5 million euros per day in September from 1 million in June, according to Bank of Greece data. Average monthly trading volumes plunged to 1 million euros in September 2011, from a peak of 136 billion euros seven years earlier, the data show.

The gains in Greek bonds comes five months after the nation pushed through the largest sovereign-debt restructuring in history, convincing investors to write off more than 100 billion euros of debt to pave the way for a second international bailout.

Five-Year Recession

The country, which sparked Europe?s financial turmoil in 2009, last sold bonds in March 2010 and is in a fifth year of recession.

Even after the recent advances, Greek bond prices reflect the risk of a euro-exit and another restructuring, said Alessandro Giansanti, a senior strategist at ING Groep NV.

At 29 cents on the euro, Greece debt is worth less than half that of two of the other euro-region nations under bailout programs. Portugal 10-year bonds are priced at 77 cents on the euro, while Ireland?s nine-year bonds trade at 100 cents.

?There has been a rally in the prices from very low levels,? Amsterdam-based Giansanti said. ?Distressed debt investors are looking at what has been priced in and seeing if there was too much. The concerns are still there.?

Third Point Offshore Investors Ltd listed Greek sovereign debt as one of its five ?top winners? for September and among its six leading positions by size, according to an Oct. 2 regulatory filing.

Default ?Overstated?

?We often make money in credit situations where our assumptions are not rosy, but simply less draconian than those of a market in panic,? the New-York based company said in its third-quarter investment letter on Oct. 3. ?Draghi?s campaign to save the euro began in late July, and reinforced our belief that the probability of a Greek default was overstated.?

Funds managed by Universal-Investment increased their holdings of Greek debt by 43 percent to 39.7 million euros between June and October, according to data compiled by Bloomberg.

?We have several funds investing in Greek debt,? Bernd Obergfell, a Frankfurt-based spokesman for Universal, which oversees about 146 billion euros, said by e-mail yesterday. He declined to comment on the decisions of individual managers.

Securities issued in the country?s debt restructuring that have returns linked to the nation?s economic growth also are advancing. The so-called GDP warrants on bonds maturing in 2042 climbed to 67 cents on the euro from as low as 25 cents in May.

Growth Warrants

The GDP warrants came into being in exchange for a 1 percentage-point reduction in the coupons on the bonds to be issued in the country?s debt restructuring.

?The warrant is basically a bet on growth,? said Zoeb Sachee, London-based head of European government bond trading at Citigroup Inc. ?The more it looks like Greece will be saved and there is a light at the end of the tunnel, the more you think Greece will grow and the more valuable the warrant becomes.?

For each 1,000 euros of bonds investors handed over during the restructuring, they received 315 warrants, which pay no interest until both economic growth and gross domestic product exceed pre-set thresholds. Payments are made on a sliding scale depending on the growth and are capped at 1 euro per warrant, said Gabriel Sterne, an economist at Exotix Ltd. in London.

The securities, which the Greek government can repay from 2020, potentially begin to pay out in 2014 if economic growth exceeds 2.35 percent and GDP is more than 210.1 billion euros. By 2021, the economy must be bigger than 266.5 billion euros with growth of 2 percent or more, according to Exotix. Greece?s GDP was 215 billion euros at the end of last year, according to the European Commission.

?For Greece not to exceed those targets longer term would require something beyond apocalyptic,? Sterne said in a telephone interview. ?They?d be worth something even if Greece leaves the euro.? [Bloomberg]