Bondholders Bullish on Greece - NYTimes.com LONDON - As Greece girds for an election on Sunday that top politicians warn could ultimately force the country to leave the euro zone, some risk-happy investors have adopted an improbable rallying cry: buy Greek bonds now. Among counterintuitive bets, few in Europe match this one. Just two months ago, foreign investors were forced to accept a 75 percent loss on their Greek debt holdings. And the widely held view is that even the newly restructured and already deeply discounted Greek bonds will face another write-down once Greece runs out of cash again. The common wisdom holds that the new Greek government, whatever its composition, will be unable to force another round of public spending cuts on its people. That could prompt Greece to leave the euro currency union and default on its debt. But the contrarians, who are mainly distressed-debt experts, see a buying opportunity. They favorably compare the junklike 21 percent yields on Greek bonds to the much lower returns, but comparable risks, on bonds of international renegades like Venezuela and Argentina, which now trade in the 11 to 13 percent range. "This is the trade of the year," said Hans Humes, president of Greylock Capital, a New York-based hedge fund. Greylock is actively buying the debt at prices that have ranged from 19 to 25 cents on the dollar. "It's a no-brainer," Mr. Humes said. To be clear: the strategy is fraught with risk. But unlike previous and largely unsuccessful hedge fund strategies that tried to control how and when Greece might pay off investors, this bet is a pure play that Greece is going to survive as a member in good standing of the euro zone nations. Investors like Mr. Humes are betting that a new Greek government - even if it is a coalition that includes unruly splinter parties - will have to accept demands from Europe and the International Monetary Fund that the country adopt yet another round of to-the-bone spending cuts, to secure the money it needs to survive and make good on its debts. Bond traders say that others now doubling down on Greece include Banco BTG Pactuel, the Brazilian investment bank; Finisterre Capital, a London-based fund company that specializes in emerging markets and, in particular, Brevan Howard, one of Europe's largest hedge funds. Mr. Humes was a member of the steering committee that negotiated the deal in March that erased 100 billion euros from Greece's still-staggering debt load, but left investors like himself with eye-watering losses. Even after that bailout deal, Greek government debt is 160 percent of its gross domestic product - still the highest level in Europe. But instead of selling the revamped bonds as almost certain to fail, the way many investors have done, Mr. Humes has been aggressively adding to his position. His thesis is simple. With European governments and the I.M.F. now owning nearly three-quarters of Greek debt, there is not likely to be another restructuring that would force bondholders to take another big haircut. That is because, according to this theory, the European Union and I.M.F., will do whatever it takes to prevent the ultimate holders of that debt - taxpayers in Europe and the United States - from suffering the type of losses on Greek bonds that commercial investors had to stomach. Traders also note that the amount of Greek debt in private hands is relatively small, about 12 billion euros ($15.7 billion) - a level that back in the heyday of Greek borrowing earlier this decade might have been the size of a single bond issue. With so little debt in private hands, investors like Mr. Humes say, it would make little sense for Greece to force another restructuring on private investors because it would make no more than a small dent in Greece's daunting debt burden of 260 billion euros ($353 billion). "Greece will not default on the private sector this time around," Mr. Humes predicted. The investors buying Greek debt, particularly BTG Pactuel and Mr. Humes's Greylock, tend to be veterans of the debt restructuring wave in Latin America in the 1990s. Then, countries like Mexico and Brazil forced bondholders to take a loss on their original securities and to accept so-called Brady bonds in return. When these countries made good on their promises to reform their economies, the new bonds, which took the name of their intellectual father, Nicholas F. Brady, the former United States Treasury secretary, soared in value. They made a mint for those who were brave enough to load up on them at the beginning. Bravery - or thrill-seeking, at least - is once again crucial. This week the ratings agency Fitch said a Greek exit from the euro zone was increasingly likely. And in a pre-election report on Greece, economists at UBS said that investors should be "worried, very worried" about the prospect that the vote will result in a government without the strength and credibility to push through the next round of spending cuts. UBS calculates that Greece still needs to come with budget trims equivalent to more than 7 percent of G.D.P. With the Greek economy in its fifth year of recession and with unemployment more than 20 percent, even the strongest of governments would be hard pressed to ask such an additional sacrifice from its citizens - to say nothing of the new government that, whatever the election results, is likely to be one of the most fractious in recent history. What is more, UBS contends, even with the recent restructuring, Greece's interest payments remain too much for the country to bear over the long term, at 15 percent of government tax revenue. Even a 10 percent figure would be considered unsustainable by credit analysts. The Greek bond bulls are not ignoring all this. They're just saying that these many negatives are already reflected in the price. "The politics are shambolic and the recession is massive," said Alex Garrard, a senior debt trader for BTG Pactuel in London. But in the end, Europe cannot walk away from Greece.