Vulture Funds: Lessons from Greece

23 February by Daniel Munevar

CC - Flickr - meenakshi madhavan

The experience of the Greek debt restructuring of 2012 serves as a good example to show how vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
operate and the costs they can impose in a country and its population. The Greek case is quite interesting as not only involved the first major debt restructuring in Europe since 1953 but also it was the largest operation of its kind. The remarkable aspect of this episode is that the country decided to continue paying holdout creditors, and specifically vulture funds, in full. This was the case even though the process was organized with the support of the official creditors of the country. In this regard, it created yet another damaging precedent regarding the viability of the profits by litigation strategy followed by vulture funds.

The involvement of vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
with Greece can be traced back to the first rescue program of 2010. Even though it was clear at that time that Greek government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. was unsustainable, the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
, the ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
and the EU Commission excluded the option of a debt restructuring. This created a problem of moral hazard Moral hazard The effect on a creditor’s or an economic actor’s behaviour when they are covered against a given risk. They will be more likely to take risks. Thus, for example, rescuing banks without placing any conditions enhances their moral hazard.

An argument often used by opponents of debt-cancellation. It is based on the liberal theory which considers a situation where there is a borrower and a lender as a case of asymmetrical information. Only the borrower knows whether he really intends to repay the lender. By cancelling the debt today, there would be a risk that the same facility might be extended to other debtors in future, which would increase the reticence of creditors to commit capital. They would have no other solution than to demand a higher interest rate including a risk premium. Clearly the term “moral”, here, is applied only to the creditors and the debtors are automatically suspected of “amorality”. Yet it is easily demonstrated that this “moral hazard” is a direct result of the total liberty of capital flows. It is proportionate to the opening of financial markets, as this is what multiplies the potentiality of the market contracts that are supposed to increase the welfare of humankind but actually bring an increase in risky contracts. So financiers would like to multiply the opportunities to make money without risk in a society which, we are unceasingly told, is and has to be a high-risk society… A fine contradiction.
, as the official funds provided by the IMF and European governments were allowing private creditors, such as French and German banks, to shift their losses onto official creditors. Furthermore, the moral hazard created by the first program meant that as long as official funding was available it could be profitable for financial institutions to lend money to an insolvent Greece. The reason for this was that official funding was effectively guaranteeing all the short-term debt repayments of the country between 2010 and 2013. Given that the event of a default and consequent restructuring was not a matter of if but of when, substantial profits could be made by vulture funds following two strategies. On the one hand, to buy Greek bonds at prices below the expected price of a debt restructuring. On the other, to target government bonds under foreign law so as to be able to litigate against the country and recover their full value after a debt restructuring.

In the case of the first strategy, the first bailout program never managed to convince the markets regarding its capacity to stabilize Greek debt. In the weeks preceding the approval of the program, and the risk of a default loomed in the horizon, the price of 10-year Greek government bonds dropped as low as 60 cents on the Euro. |1| Once it was announced in May of 2010 that debt restructuring was not being considered as part of the program, prices recovered to 90 cents on the Euro. This behavior can be explained as large investors started to sell their exposure to Greece in the expectation of default. Thus, the only market for Greek government bonds was either Greek banks, which could use the bonds as collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. with the ECB, or vulture funds willing to take on the risk. From May of 2010 forward, the prices of bonds continued to drop steadily through time. By the fall of 2011, as discussions regarding a debt restructuring plan began, prices dropped under 20 cents.

At this point, vulture funds were actively engaged. Their strategy was based on buying the bonds at depressed levels below the expected value of newly exchanged bonds issued in a restructuring. Several funds tried this strategy in early 2011, when they assumed that prices of Greek bonds would be exchanged at around 80 cents on the euro. They proceeded to buy the bonds at around 50 cents on the Euro expecting to profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. from the difference. However, as it was announced in the fall of 2011 that the restructuring would be more significant and prices continued to drop, they eventually lost this trade. |2| This failure didn’t discourage other vulture funds from trying the same approach later on, and eventually succeed. One known example corresponds to Third Point. Based in NY and managed by Dan Loeb, Third Point accumulated in early 2012 a total of USD 1 billion in Greek government bonds bought at around 17 cents. Once the successive debt exchanges that were part of the April 2012 debt restructuring were completed, Third Point was able to exchange its bonds for new securities issued by the ESM ESM
European Stability Mechanism
The European Stability Mechanism is a European entity for managing the financial crisis in the Eurozone. In 2012, it replaced the European Financial Stability Facility and the European Financial Stabilisation Mechanism, which had been implemented in response to the public-debt crisis in the Eurozone. It concerns only EU member States that are part of the Eurozone. If there is a threat to the stability of the Eurozone, this European financial institution is supposed to grant financial ‘assistance’ (loans) to a country or countries in difficulty. There are strict conditions to this assistance.
at a price of 34 cents. This netted Third Point a hefty profit of USD 500 million. |3|

The second strategy was based on targeting specific sets of government bonds under foreign law in which vulture funds could buy controlling stakes so as to block a restructuring and subject the Greek government to litigation. At the time when the negotiations between the creditors and Greece began, around 177 billion Euros of government debt (86 % of the total) was under domestic law. The remaining 28.8 billion euros scattered in bonds under English, Japanese, Swiss and Italian law among others. The largest among these were the bonds under English law which amounted to 20 billion Euros, or 10 % of the total. |4| Furthermore, whereas the government could retroactively change the conditions on the domestic law bonds to ensure that a debt restructuring was binding to all investors, this was not the case for foreign law bonds. In their case, the decision to restructure could only be achieved bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. by bond and it usually required the approval of between 66.7 and 75 % of the investors. Thus, vulture funds actively targeted these series of bonds so as to achieve a controlling majority and force the government to pay in full or else force it into an Argentina type of litigation. For example, law firms Bingham McCutchen and Brown Rudnick were openly campaigning for this type of approach in early 2012, as they searched to gather enough investors in government bonds under Swiss law so as to pursue litigation instead of accepting the results of the debt restructuring. |5|

The strategy advocated by these law firms, among others, turned out to be extremely successful. Once the debt restructuring was concluded, a haircut of around 65 % in net present value (53,5 % in the facial value) was imposed on 199.2 billion worth of government bonds. However, there was a total of 6.4 billion Euros in bonds held by vulture funds and other holdouts. These were scattered in 25 series of government bonds, of which 24 were under foreign law. Of these, in 7 cases the government did not even attempt to amend the conditions of the bonds whereas in other 16 the holdouts rejected the conditions offered. |6| Despite the warning of Greek government officials regarding the unwillingness of the country to pay holdouts in the weeks preceding the final agreement, Greece caved in and paid these debts in full while inflicting massive losses on small investors and the pension funds Pension Fund
Pension Funds
Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets.
of the country. |7|

Just a month after the debt restructuring was completed, the government made an initial payment of 436 million Euros to a group of holdout investors led by Dart Management. |8| This hedge fund, which had a long story of suing governments to get paid in full going back to the Brady plan in Latin America in the late 1980s, made a massive profit as it had bought the bonds on prices estimated between 60 to 70 cents on the Euro. By making that initial payment, the Greek government set a negative precedent as the rest of the holdouts were now able to use that decision to claim for equal treatment under a foreign court. The payments to holdouts continued uninterrupted afterwards parallel to the implementation of harsh austerity measures. For example, during 2013 the country paid a total of 1.7 billion Euros to holdout creditors. |9| To date, most of the holdout claims have been paid in full by Greece. It is estimated that private investors currently have a total of 36 billion euros in government bonds that were either issued under the debt exchange of 2012 or in the debt issuance that took place in 2014. |10|

As the Greek population continues to struggle under the imposition of harsh austerity measures and the debt burden of the country remains “highly unsustainable”, as the IMF characterizes it, |11| it is evident that the decision to continue paying the holdouts was a mistake. It represented nothing short of rewarding dangerous speculators while transferring the costs of their actions on to the Greek people. Even more troublesome is the fact that the relationship between Greece and the vulture has not ended yet. In the aftermath of the debt restructuring of 2012, it is estimated that hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. have bought nearly 15 billion Euros in government bonds. |12| As a new debt restructuring, or even unilateral default, is simply a matter of time is worth nothing that the country can still set a precedent against the actions of vulture funds. The country could begin by enacting a law, similar to that adopted in Belgium in 2015, to limit the actions of vulture funds. Furthermore, given the dire social situation in the country, it should declare the non-application of the 3rd memorandum and non-payment of all illegal, odious, illegitimate and unsustainable debts. After all it is never too late to state that sovereignty and the respect of human rights will always precede debt.


|1| Wall Street Journal. (2011). Bargain Hunting: Path to Default. Retrieved February 6, 2017, from

|2| New York Times. (2012). Hedge Funds Take Another Look at Greek Debt - The New York Times. Retrieved February 6, 2017, from

|3| Financial Times. (2012). Greek bond bet pays off for hedge fund. Retrieved February 6, 2017, from

|4| Zettelmeyer, J., Trebesch, C., & Gulati, M. (2013). The Greek Debt Restructuring: An Autopsy. WP 13-8 Peterson Institute for International Economics. Retrieved from

|5| The AMLAW Daily. (2012). Greece Discloses Fees Paid to Cleary During Sovereign Debt Crisis. Retrieved February 6, 2017, from

|6| Zettelmeyer, J., Trebesch, C., & Gulati, M. (2013). The Greek Debt Restructuring: An Autopsy. WP 13-8 Peterson Institute for International Economics. Retrieved from

|7| New York Times. (2012). Greek Official Warns Debt Holdouts - The New York Times. Retrieved February 6, 2017, from

|8| New York Times. (2012). Bet on Greek Bonds Paid Off for “Vulture Fund” - The New York Times. Retrieved February 6, 2017, from

|9| Kamenis, S. (2014). Vulture Funds and the Sovereign Debt Market: Lessons from Argentina and Greece Vulture Funds and the Sovereign Debt Market: Lessons from Argentina and Greece. Retrieved from

|10| WSJ. (2017). Greece’s Debt Due: What Greece Owes When - Retrieved February 6, 2017, from

|11| WSJ. (2017). IMF Assesses Greek Debt as “Highly Unsustainable” - WSJ. Retrieved February 6, 2017, from

|12| Greek Reporter. (2012). 15 billion euro of the Greek debt is in the hands of hedge funds. Retrieved February 6, 2017, from


Daniel Munevar

is a 30-year-old post-Keynesian economist from Bogotá, Colombia. MPAff. LBJ School of Public Affairs at the University of Texas at Austin. From March to July 2015 he worked as a close aide to former Greek finance minister Yanis Varoufakis, advising him on issues of fiscal policy and debt sustainability. He was previously fiscal advisor to the Ministry of Finance of Colombia and special advisor on Foreign Direct Investment for the Ministry of Foreign Affairs of Ecuador. He is considered to be one of the foremost figures in the study of Latin American public debt. He is member of CADTM AYNA.



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