Hedge funds to gain as Cyprus bonds repaid

THE CYPRIOT government repaid €1.42bn (£1.21bn) to bond holders yesterday, using most of the €2bn tranche of EU-IMF bailout funds it received last month.

Bond prices fell during the panic that swept Cyprus in February and March, meaning that those who purchased the assets recently stand to make significant profits. This will be a particular boon for hedge funds who picked up the Cypriot bonds at their lowest prices.

“The percentage going to hedge funds is pretty high,” an analyst said yesterday. Just a handful of funds are expected to benefit, but the profits are likely to be in the “hundreds of millions” of euros rather than billions, they added.

The Cypriot government was criticised in March for agreeing to an EU-IMF deal which provided €10bn of emergency funds in exchange for a levy on depositors. Bondholders were not affected by the arrangement.

Joe Seet, senior partner at Sigma Partnership, said that the previous experience of hedge funds with Greek bonds had led to increased interest in Cyprus when small investors rushed to sell their bonds during February’s panic.

He said: “The reason why there’s interest by hedge funds is because it worked with Greece”, adding, “the Bundesbank and the European Central Bank (ECB) won’t let Cyprus go down. Betting against the ECB is a very dangerous game”.

Hedge funds like Third Point made large returns by gambling that Greece would not be left to collapse. Other groups made significant losses as Greece struggled. Though the size of the repayment to bondholders is small by international standards, it is the equivalent of 5.75 per cent of the country’s 2011 GDP, which saw severe contraction earlier this year.