ECB headquarters in Frankfurt, Germany. (Photo: AP)

London- and New York-based hedge funds are among those that hold Greek bonds and are resisting haircuts advocated by the Greek government to help the country avoid default.

If they stick to their guns and refuse to accept what the European Central Bank says must be a voluntary cut in value, they could trigger credit default swaps, which in turn would create a “credit event” that could substantially escalate the debt crisis.

Unidentified sources cited in a Bloomberg report said former Deutsche Bank credit trader Boaz Weinstein’s Saba Capital Management, Jamie Dinan’s $14 billion York Capital Management and London-based CapeView Capital are among those now holding Greek bonds. The Greek government has been pressing banks and other creditors to accept swaps that would result in losses of more than 50% in value, and to do so voluntarily.

Sudeep Singh, a hedge fund manager at Matrix Group Ltd. who doesn’t own Greek debt, was quoted saying, “I would expect to see some holdouts. The industry breaks down into guys who want to keep on fighting and into guys who just want to get the best deal and move on. It’s all a question of what price you got in at.”

A default would trigger a “credit event,” which would bring severe consequences that would worsen the debt crisis. CDS, which pay the face value of securities in default in exchange for the securities themselves or a cash equivalent in the event that a borrower fails to meet its obligations, could be triggered by hedge funds that refuse to accept a voluntary swap for securities of lesser value.

Officials in Europe, including Jean-Claude Trichet, the former head of the European Central Bank, have worked very hard to avoid such a triggering event, since it would mean traders could bet against other debt-ridden countries in Europe, such as Portugal, Italy and Spain.

A number of fund managers are resisting voluntary losses and want to be paid in full. Open Europe, a research group based in London and Brussels, estimates that of the 355 billion euros ($450 billion) of outstanding Greek debt, about 80 billion euros is held by overseas investors such as insurers, sovereign wealth funds and hedge funds. About a third is held by the ECB, the European Union and the International Monetary Fund, and most of the rest is held by banks.

Andreas Koutras, an analyst at InTouch Capital Markets Ltd. in London, said hedge funds should refuse to accept losses as long as the ECB refuses to accept losses, since legally it is difficult for a sovereign to default on payments to one holder while providing full payment to another.

If the ECB refuses to take losses, he added, hedge funds should hang on in favor of full repayment. He was quoted saying, “If the ECB is out, then for sure you should try to free ride on the back of the ECB. You’d be stupid to actually participate if the ECB does not.”