Hedge funds have out negotiated European finance ministers at multiple stages of the European sovereign debt crisis. The latest instance was the Greek debt buy-back agreement.
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Private funds have profited nicely during the crisis by either speculating in Greek bonds or by buying the senior debt of failed Spanish banks. Their bets have been correct that Europe would favor taxpayer-financed bailouts over forcing concessions from the private sector.
Deutsche Bank senior executives counseled Europe to take a hard stance toward the private hedge funds that owned Greek debt and use a legal mechanism that would force the hedge funds to buy back the bonds at a lower price than they might otherwise accept.
By forcing the hedge funds to sell at 28 to 30 cents on the dollar instead of the 34 to 35 cents on the dollar the funds were hoping to receive, Greece could significantly quite feasibly reduce a significant portion of its debt at a reasonable price.
But Europe rejected the idea and the hedge funds pocketed larger profits than many had expected.
Europe could have saved about €2 billion if it had taken the bank executive’s advice. Instead, yet another transaction worked in favor of the hedge funds, increasing the likelihood that future debt deals will be more costly for Europe.
Since Europe would not agree, bankers were instructed to devise a voluntary plan. When the hedge funds saw they had the upper hand, they pressed for a higher price
—35 cents on the dollar.
Instead of the previously agreed-upon average price of 28 cents on the dollar, the funds received 33 cents on the dollar.