Greeks ban hedge funds in bond sale

By David Oakley in London and Kerin Hope in Athens and Quentin Peel in Berlin

Published: March 5 2010 21:03 | Last updated: March 5 2010 21:03

Greece ordered its bankers to exclude hedge funds from a bond offering this week in an effort to punish the speculators it blames for destabilising its debt markets.

The decision came amid growing anger among European leaders over what they see as the role speculators played in undermining the Greek debt market and driving the country towards a possible default.

In a meeting in Berlin on Friday Angela Merkel, the German chancellor, and George Papandreou, the Greek prime minister, promised a joint push both in the European Union and the Group of 20 leading economies to clamp down on speculators who seek to exploit uncertainty over sovereign debt.

Ms Merkel said that both countries would seek “to show that speculative instruments need to be contained, especially where it is speculation against states”. She mentioned credit default swaps as one target of such an initiative, but gave no other clear details.

According to people familiar with this week’s €5bn Greek bond issue, authorities in Athens told banks handling the sale to make sure they did not allocate any bonds to hedge funds or any bodies that might be a proxy for them.

Government bond managers prefer to sell their bonds to traditional “buy and hold” investors such as asset managers, pension funds and life insurance companies rather than hedge funds. Hedge funds can cause sharp swings in bond prices as they buy and sell quickly in an effort to make fast profits.

This week’s instruction from Athens went further than usual, according to people familiar with the deal. Petros Christodoulou, head of Greece’s debt management agency, said, “The vast majority of the issue went to real money investors.”

One hedge fund manager said, “Here is a country struggling to sell its bonds. Surely it should not be turning away buyers.”

He said hedge funds provided liquidity to markets enabling traditional funds to buy and sell their bonds more easily.

The Greeks’ new 10-year bond attracted hardly any trading on Friday, which is worrying for those investors that might want to sell for reallocation purposes in the future.
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