Bondholder fury as Athens pays off debts to hedge funds

Bondholders, who were forced to accept losses of around 75pc on their debt two months ago or lose everything, hired lawyers to claim they were "fraudulently misled" after Athens repaid €435m to debtors who resisted the restructuring.

The owners of the €435m bonds are hedge funds that refused to accept the terms of the bond swap in March, despite being repeatedly warned that Athens would not have any money to pay them later. But when the bonds fell due on Tuesday, Athens decided to pay them in full to avoid more uncertainty amid the political chaos.

An official involved in the negotiation said: "It was considered imprudent to default on a bond issue at a moment of political instability, when the country's membership of the euro is being questioned."

However, in solving the immediate threat, lawyers said Greece now has a far bigger problem. Bondholders with a total of €6.4bn refused to participate in the so-called private-sector involvement (PSI), leading to questions about whether they will also be paid in full.

James Campbell, partner at London-based law firm Pillsbury, said he had been instructed by bondholders who did accept losses to pursue their case. He confirmed: "Bondholders feel they were fraudulently misled when the negotiating authorities said there was no alternative to the restructuring. Clearly there was, and now bondholders want to recover their losses."

Mr Campbell added: "The decision by Athens to repay the €430m in full will have serious repercussions for any future debt restructuring and the sovereign bond market as a whole. The system only works if bondholders can trust sovereigns."

The Greek finance ministry said in a statement: "The decision weighed carefully all relevant factors and implications as well as the current conjuncture. Today's decision does not prejudice future decisions on the treatment of the remaining bonds
not tendered in the PSI exchange."

More than 85pc of Greek bondholders accepted the deal in March, which was the biggest sovereign restructuring ever attempted. The deal, which took nearly eight months to thrash out, was a precondition to international leaders releasing the €130bn second bail-out needed to avert a Greek default.

It was achieved after Greek politicians controversially inserted Collective Action Clauses (CACs), which allowed them to impose the deal with just 66pc of support from bondholders. Experts warned that the legal challenge to Greece would face an uphill battle because bondholders agreed to the swap.

One credit hedge fund said the claim was "emotional" rather than substantial. "Some outriders have got lucky but that doesn't mean that everyone else can get paid, that's still impossible."

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Hedge Funds Cut Wagers as Fed Signals Less Stimulus: Commodities

Hedge funds reduced bullish bets on commodities for a second consecutive week as the Federal Reserve signaled it may refrain from more monetary stimulus, increasing concern that growth will slow and curb demand for raw materials.

Money managers lowered net-long positions across 18 U.S. futures and options by 2.8 percent to 1.1 million contracts in the week ended April 3, data from the Commodity Futures Trading Commission show. Bets on higher corn prices fell to the lowest since February, while those on hogs dropped by the most since May. Speculators cut wagers on costlier crude oil for a third week, and are now the least bullish in two months.

Minutes from the March 13 Fed policy meeting released April 3 showed policy makers will probably hold off on increasing monetary accommodation unless the U.S. economic expansion falters. The Standard & Poor's GSCI gauge of 24 commodities rose more than 80 percent from December 2008 to June 2011 as the central bank set rates at a record low and bought $2.3 trillion of debt in two rounds of quantitative easing. The U.S. economy will accelerate this quarter and the next, economist estimates compiled by Bloomberg show.

"The market is addicted to stimulus," said Jeffrey Sica, the Morristown, New Jersey-based president of SICA Wealth Management who helps oversee $1 billion of assets. "This market has risen because of the liquidity push and the market will decline when it's deprived of liquidity."

Steepest Decline

The S&P GSCI index rose less than 0.1 percent last week after tumbling 2 percent the day after the Fed minutes were released, the steepest decline since mid-December. Cocoa, cotton,wheat and gold led the declines as corn, nickel and soybean futures advanced. The MSCI All-Country World Index of equities slid 1.6 percent, and Treasures returned 0.2 percent, a Bank of America Corp. index shows.

Goldman Sachs Group Inc.'s commodity research team, led by Jeffrey Currie in London, cut its three-month recommendation on raw materials to "neutral" on March 28, warning that the economy will "soften" this quarter. The S&P GSCI retreated 0.9 percent since then.

Bank of America Merrill Lynch's team, led by Francisco Blanch in New York, retained an "overweight" recommendation April 2, citing the risk that conflict over Iran's nuclear program will drive energy prices higher. Central banks are extending the provision of liquidity and cutting interest rates to shore up growth, the team wrote in a report to clients.

Emergency Stimulus

The Fed has pledged to keep interest rates near zero through 2014, and the European Central Bank kept its key rate at a record low of 1 percent on April 4. ECB President Mario Draghi quashed talk of an early exit from emergency stimulus measures the same day. The ECB has expanded its balance sheet by about 30 percent since November, pumping more than 1 trillion euros ($1.3 trillion) into the banking system.

"As long as there is loose monetary policy and the world shows net growth, commodity prices will remain firm," said Michael Cuggino, who helps manage about $15 billion of assets at Permanent Portfolio (PRPFX) Funds in San Francisco. "The demand for commodities is unlikely to weaken."

The U.S. added 120,000 jobs in March, the smallest increase in five months and less than the most pessimistic estimate in a Bloomberg survey of economists, a Labor Department report showed April 6. The economy will expand 2.2 percent this quarter and 2.5 percent in the next, compared with 2 percent in the first three months of the year, according to the median of 74 economist estimates compiled by Bloomberg.

Open Market

The jobs data may help build a case for further easing at the June meeting of the Federal Open Market Committee, said John Silvia, the chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. U.S. commodity markets were shut on the day of the report for the Good Friday holiday.

Bets on a copper rally rose 25 percent to 18,642 contracts in the week ended April 3, the highest since early August, the CFTC data show. Inventories of the metal monitored by the London Metal Exchange tumbled 29 percent this year. Demand will exceed supply by 13,000 metric tons this year, and the deficit will widen to 17,000 tons in 2013, analysts at Morgan Stanley led by Hussein Allidina in New York said in a report April 2.

Investors put $79 million into commodity funds in the week ended April 4, the same amount as a week earlier, according to Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Open interest, or contracts outstanding, across the 24 commodities in the S&P GSCI advanced 1.9 percent, advancing for a second consecutive week and taking this year's expansion to 19 percent, data compiled by Bloomberg show.

Arabica Coffee

Bullish soybean wagers climbed 12 percent to 235,387 contracts, the highest since Bloomberg began compiling the data in June 2006. A U.S. Department of Agriculture report may show this week that South American crops will be smaller than forecast after drought, according to a Bloomberg survey of as many as 20 analysts. Soybeans jumped 2.2 percent to $14.34 a bushel last week in Chicago as arabica coffee added 0.3 percent to $1.83 a pound in New York.

Copper fell 1 percent last week on the LME, paring this year's advance to 10 percent. Growth in China, the world's biggest metals consumer, will slow to 8.3 percent this year, from 9.2 percent in 2011, according to the median of 11 economist estimates compiled by Bloomberg. Premier Wen Jiabao cut the nation's growth target to 7.5 percent last month, the lowest since 2004.

Extra Policy Easing

A purchasing managers' index for the Chinese services industry dropped to 53.3 last month, from 53.9 in February. Readings above 50 indicate expansion. The country needs extra policy easing to spur growth and the rest of Asia "urgently" needs the nation's economy to turn, Frederic Neumann, an analyst at HSBC Holdings Plc in Hong Kong, said in a report April 3.

"China is in a very precarious state and it could easily turn into a hard landing," said Stanley Crouch, who helps oversee $2 billion of assets as chief investment officer at New York-based Aegis Capital Corp. "If you look at all the interventions the Fed and ECB have undertaken they have not great results to show. We are going to probably have a big correction because of China's hard landing."

To contact the reporter on this story: Debarati Roy in New York at droy5@bloomberg.net

To contact the editor responsible for this story: Patrick McKiernan at pmckiernan@bloomberg.net

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