Greeks ban hedge funds from auction

March 7, 2010 | By Jim Kim

The Greek government has escalated its war against speculators by seeking to ban hedge funds (hedge fund news) and their proxies from buying bonds offered last week. It has the support of Germany apparently, where the chancellor has said publicly that "speculative instruments" need to be contained.

The main target seems to be credit default swaps (CDS news), the use of which has been defended by top banks. But you have to wonder if this is a misguided policy. Obviously, they would rather have long-term buy-and-hold investors holding the the bonds. But what about liquidity? It seems the auction itself went well. But how far does the government ban go? Does this mean that hedge funds cannot purchase the government bonds in the secondary market? Is that possible to enforce. If the fiscal restructuring doesn't go as planned, the value of these bonds could take bigger hits in the absence of liquidity. We'll just have to see.

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