Hedge Funds Cyprus Bonds
Hedge Funds Betting Against Cyprus DefaultHedge funds are seen to be wagering against a Cyprus default and due to net large gains if the small island country manages to pay its creditors. Cyprus has to raise an estimated EUR5.8bn in order to secure bailout funds but the chances of Cyprus passing some of that burden onto ordinary depositors (an extraordinary move that was met with intense protests) is looking uncertain. According to Reuters, hedge funds own about half of the June 2013 bond and are betting that Cyprus and its partners is the Eurozone will ultimately prevent a default one way or another and that bondholders will be paid in full.
The market price of a Cypriot sovereign bond due to mature in just over two months suggests a gamble by hedge funds that the country will avoid a default will pay off. The EUR1.4bn 3.75% bond, due to be redeemed on June 3, is bid at 83% of its face value, signalling that the market expects creditors will be paid in full even though a EUR10bn bailout hangs in the balance.
The country's parliament on Tuesday voted unanimously against the controversial plan to make domestic depositors foot part of the bill for the island's debt woes, but market participants say an unprecedented levy on depositors to raise EUR5.8bn will be passed in one way or another.
Cyprus must raise that cash in order to secure the bailout money.
According to market sources, around half of the June 2013 bond is owned by hedge funds, but while its price has fallen by around seven points this week, a restructuring of Cyprus' EUR4bn sovereign debt is not on the table.
"There is a calculated gamble here that the contagion from deposit holders is less important than the contagion you would see if the Troika forced PSI in a second European country," said a portfolio manager at a large European fixed income fund. Source