North Asset's Papamarkakis Sees Europe's Debt Crisis Resurfacing

Europe's sovereign-debt crisis will resurface in markets even after the European Central Bank pumped money into the banking system and Greece restructured its debt, according to George Papamarkakis at North Asset Management LLP. "We still have big issues," Papamarkakis, chief investment officer and co-founder of North Asset, said at a Bloomberg Link conference in Frankfurt. "Portugal needs to tap the credit markets next year and clearly that is not possible. Everyone is looking at Spain and France is the big elephant in the room." Spanish bonds fell for a ninth day today and the euro dropped against the yen and the dollar. A measure of manufacturing in the euro area contracted in March more than forecast, adding to concern that the major European economies of Germany and France are slowing. "The ultimate result is really very difficult to predict, but we will have some kind of common issuance or some countries will go out" of the 17-nation euro area, London-based Papamarkakis said. "But we will see a lot of volatility." The manager said that his company holds instruments that climb with rising volatility in fixed-income and interest-rate markets. He owns some sovereign bonds in the region, while he has shorted debt from other nations he didn't identify. Short sellers profit from taking bets that securities will drop in value.

Bet on Volatility

Investors should bet on an increase in volatility, said David Hauner, head of eastern Europe, Middle East and Africa fixed-income strategy and economics at Bank of America Corp.'s Merrill Lynch unit.
"The one thing you should be doing right now is buying volatility, because it is ridiculously low," Hauner said at the same conference. "It is hard to see what will we be the next source of disruption. But it is very clear that there will be a significant spike in volatility." Greece pushed through the biggest sovereign-debt
restructuring in history this month after getting private investors to forgive more than 100 billion euros ($132 billion) of debt. The Mediterranean nation needed the deal to obtain a second bailout from the other 16 euro-area countries. Politicians think that a country can default without disrupting the markets, Papamarkakis said.
"Greece means the private sector and the banking sector is in a worse situation, and that is what will happen with Portugal. We are actually increasing the risks" with bailouts for states and banks, "and I don't know if politicians appreciate the Pandora's Box they've opened with this Greece default."

Alexis Xydias and Abigail Moses (Bloomberg)

DJ Dollar's Plunge Hurts Hedge Funds Holding Bullish Bets

Many hedge funds managed to exit their bets on the dollar before its tumble Thursday.But an unfortunate few didn't make it out in time. The dollar plunged 2% against the euro to $1.419 Thursday afternoon in New York - its biggest one-day percentage drop since July 2010 - and saw even steeper losses against the Australian dollar and other currencies.
The drop came as European leaders secured a deal to reduce Greece's crushing debt and expand the firepower of their rescue fund for struggling members of the euro-currency zone. Meanwhile, the U.S. economy expanded by 2.5% in the third quarter, curbing fears of recession. However, funds had scaled back their bullish bets on the dollar in October, after piling into the currency the month before, when the economic outlook looked bleaker.
There was an "aggressive reduction of 'long' dollar positions," in October, according to JW Partners, a research and advisory firm for currency hedge funds. A long position is a bet the dollar's value will rise against other currencies.

Traders' Targets: Portugal And Spain

As fears of financial "contagion" resurface in Europe on the back of Ireland's woes, hedge-fund managers are cautiously setting their sights on potential problems in countries such as Portugal and Spain. But they face political and other challenges in placing bearish bets.
The deteriorating economic picture in some corners of Europe clearly has the attention of many hedge-fund managers and other investors who see Ireland's rescue package as little more than a bandage for the continent's woes. They are expecting more bad news to come, predicting that borrowing costs elsewhere will become prohibitive, potentially forcing other countries to also seek a bailout or restructure their debt.

El plan europeo de apoyo a Grecia alienta a los especuladores financieros

La ayuda que la UE prometió ayer a Grecia para salvarla de la debacle económica carece de solidez para algunos `hedge funds´, que creen además que los responsables de los Veintisiete no están preparados para abordar el examen que supone la crisis interna que asola al país heleno.

Marc Von Rohr, del fondo de riesgo New Trend Capital Management, afincado en Zurich, Suiza, ha afirmado a EL BOLETÍN que la Unión Europea (UE) “encara un serio problema con Grecia”. “Por un lado, no puede permitir que Grecia salga de la Eurozona por las consecuencias que conllevaría, y por otro lado está el asunto de las ayudas, que puede crear precedentes negativos”, afirmó Rohr.

Bearish Bets On Greece: Short-Lived?

The short bet against Greece mightn't be around for long. The increasing possibility that European nations will come to the rescue of Greece is upending what had been a highly successful trade—betting that Greece would struggle or be unable to pay off its debt. The two main winning bets were buying credit default swaps, which rise as the risk of default increases, and shorting Greek bonds, which fall in value when the borrower is in trouble. In both cases, investors made big profits in recent months.

Now, with a bailout plan for Greece emerging, some investors are moving out of those now money-losing trades. A key factor hurting these trades is that if a plan goes through, there would be little doubt Greece could pay off the bonds it has issued that mature in April and May. On Monday, the annual cost of insuring €10 million of Greek government debt for five years was €341,000, down 14% from last Thursday. The cost hit a peak of €425,000 on Feb. 4.