Bloomberg News

Greek Bondholders May Face 40% Loss, Armstrong Investment Says

September 28, 2011

Sept. 28 (Bloomberg) -- Investors holding Greek sovereign debt will probably have to accept losses of around 40 percent on their holdings, according to Armstrong Investment Managers.

“Our base case is that there will be a 40 percent writedown,” Patrick Armstrong, managing partner at Armstrong Investment, which has $345 million in assets under management said in a telephone interview. “There’s a consensus that Greek bonds will be written down more than planned in the previous bailout and the private sector will participate more than they had to in the previous bail out. That’s the way sentiment and the rhetoric from policy makers is going.”

Greece became the first of Europe’s most indebted economies to need outside aid in May 2010, forcing it to implement austerity programs after its borrowing costs surged to records, locking the nation out of the debt markets. After a 110 billion- euro ($150 billion) bailout package proved insufficient, politicians want private investors to participate in a new 159 billion-euro plan for the nation.

German lawmakers have called on lenders in recent days to accept a larger writedown than the 21 percent proposed by industry lobby group the Institute of International Finance, according to a person briefed on the talks, who declined to be identified because the talks are private.

The IIF suggested in July banks participate in a bond exchange and buyback program under which they would accept voluntary losses on their investments. The European Commission said today it is unaware of any moves to increase private bondholders’ share in Greece’s next bailout.

‘Bigger Haircut’

Greek two-year yields fell nine basis points to 69.96 percent at 2:45 p.m. in London, while 10-year yields dropped 30 basis points to 23.02 percent.

Bondholders will have to take a larger loss, or so-called haircut, on their investments “to make sure that the German population and the others who are going to guarantee various bailout funds feel that there’s enough private-sector participation in the pain,” Armstrong said. “The market is discounting a much bigger haircut as well if you look at the prices of the bonds.”

The London-based fund manager owns a “small amount” of Greek 4.3 percent bonds due March 20, 2012, which it bought in July, Armstrong said.

While he thinks Greece will definitely default, Armstrong’s fund profited earlier this year from buying short-dated Greek paper, which has since matured, and betting it would be paid back in full before the Mediterranean nation declared itself bankrupt.

“The best-case scenario for us is that a new writedown is planned and by the time everything is sorted out it is after March 2012,” when our bonds mature, Armstrong said.

--Editors: Mark McCord, Nicholas Reynolds

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.


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