Hedge Funds Bet on Wider European Debt Crisis

[Angry Dragon]

By Katherine Burton and Saijel Kishan -
Thu Jul 07 19:53:52 GMT 2011

http://www.bloomberg.com/news/2011-07-07/hedge-funds-move-past-greece-with-bets-that-sovereign-debt-crisis-expands.html

Hedge funds that trade bonds and loans are increasing bets that Europe’s sovereign-debt crisis will spread to Portugal, Spain and Italy, even after Greece won a temporary reprieve with 12 billion euros in aid.

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CQS is among the hedge funds that say investors are underestimating the odds of distress or even default not only by Portugal, whose credit rating was downgraded this week to junk status by Moody’s, but also by the bigger Italy and Spain. The funds are moving beyond a direct wager that sovereign debt values will tumble, targeting potential fallout in the corporate-debt market and the banking industry

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Marathon Asset Management LP, a $10 billion fund run by Bruce Richards, told investors in mid-June that it’s evaluating the purchase of portfolios of $1 billion or more of real estate and corporate loans from banks in Portugal, Ireland, Spain, the United Kingdom and Italy as they are forced to sell debt to raise capital, according to a presentation sent to clients.

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Now that an immediate Greek default has been avoided, investors are looking for ways to play continued distress among countries including Italy, the euro area’s third-largest economy, and Spain, its fourth. The extra yield investors demand to hold Portugal’s 10-year bonds over German bunds slipped 19 basis points today to 994 basis points from a euro-era record of 1015 basis points yesterday, when Moody’s cut the country’s credit rating four levels to Ba2, below investment grade.



The carnage never stops and the vultures are the first ones there