LONDON - It is looking less likely that the Greeks can do a debt buyback on the cheap.
As Greece and its financial advisers race to set the terms for a crucial buyback of the country's deeply discounted bonds, opportunistic hedge funds are adding to their positions on the expectation that the government and its creditors will ultimately have to meet their price demand.
Hedge funds are holding firm on their stance that they will not sell for any price below 35 cents on the euro - a significant premium to today's average price of around 30 cents.
Traders say that the once trade-by-appointment market for Greek bonds has become quite robust, with as much as a billion dollars a day exchanging hands.
By Monday, Greece is expected to make clear to investors what price it will pay to get a deal done as the country tries to pay down its debt pile that tops 340 billion euros.
European officials and the International Monetary Fund have indicated that th e buyback, which aims to reduce the country's debt load by as much as 30 to 40 billion euros in order to meet future debt sustainability targets, must be completed by Dec. 13.
If the deal fails, the International Monetary Fund is unlikely to sign off on last week's debt agreement, raising the possibility that other European countries might follow suit. That would result in a bankruptcy for Greece.
Until recently, the view in Europe was that Greece, backed by a 10 billion euro loan from Europe - would be able to retire a healthy chunk of its debt by offering a close to market price of below 30 cents and then threatening to make use of collective action clauses to force holdouts to accept the offered price.
But the I.M.F.'s insistence that a buyback must take place before it signs off on new loans has emboldened hedge funds to buy more bonds in the view that Greece's creditors will not risk blowing up this week's carefully constructed deal if it means lending Greece additional funds to complete a buyback at a higher price.
Asked if there was any chance that the government would present a price below 30 cents, a person advising Greece on the deal said no.
Big macro funds such as Third Point and Brevin Howard in recent months have accumulated very large Greek bond positions expecting to be offered more on the buyback. At a price of 35 cents, some hedge funds that have scooped up debt at around 15 cents would more than double their money.
Traders say that even now, Greek bonds are attracting new buyers who are certain that they will be able to sell out of their positions at 32 cents and above.
But the question remains: will Germany sign off on additional loans that will lock in higher killings for hedge funds, even if the end result is reduced debt for Greece.
“Germany may accept a price of 35 cents,†said one Athens-based investment adviser at the center of many of these dealings. “But anything over 35 cents - no way.â€
