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Hedge funds warn eurozone on 'verge of collapse'

Fixed income hedge funds have warned that the eurozone is "on the verge of an economic collapse" which will spread far beyond Portugal and Greece.

By Nick Reeve | Published Jul 07, 2011 | comments

Hedge funds including London-based CQS UK, have moved beyond direct bets on sovereign rating falls towards looking to benefit from the fallout in the corporate debt market, according to reports in Bloomberg.

Simon Finch, head of credit trading at CQS, said that none of the measures so far had tackled solvency problems.

CQS has increased its trading in mobile phone, utility and toll-road companies in Portugal, Spain and Italy. Mr Finch told Bloomberg that he expected governments to be forced to slash spending to pay off lenders, slowing growth and reducing discretionary consumer spending.

The reports claim hedge funds have been reluctant to make big sovereign debt bets ahead of the parliamentary vote in Athens last week that led to the EU's approval of a €28bn (£25bn) loan deal.

Earlier this week, MEPs in the European Parliament called for restrictions on the use of credit default swaps (CDS) to profit from failures on sovereign debt, meaning CDS can only be bought by investors who already own the debt they are insuring against.

Billionaire investor George Soros said last month: "We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread. The financial system remains extremely vulnerable."

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