Confidence in financial markets lurched downwards yesterday as hedge funds held up a crucial deal to restructure Greece's €350bn (£290bn) debt pile.
The euro fell to a 16-month low against the dollar after signs that the agreement, designed to put the country's public finances on a sustainable path, might be derailed.
European leaders reached an agreement last October with the Institute of International Finance (IFF), the global banking lobby group, that Greek bondholders should suffer a "voluntary" 50 per cent haircut, on the value of their investments.
While large European banks have agreed to the deal, several hedge funds are believed to be holding out in the belief that the European Union and the International Monetary Fund will have no choice but to pay them off in full if they refuse to play ball.
The IIF said yesterday it hoped the deal would be concluded in a matter of days, and its managing director, Charles Dallara, flew to Athens to finalise the agreement. But the IIF confirmed that no offer has yet been made to bondholders.
"Hedge funds and other investors will need to see what the final detail is before deciding," a spokesman said.
European leaders have also been increasing the pressure on bondholders this week. The German Chancellor, Angela Merkel, said on Monday that the next tranche of EU/IMF bailout funds Greece needs to avoid a default in March will not be paid unless the restructuring deal is completed first.
Nicholas Spiro of Spiro Sovereign Strategy warned that hedge funds frustrating the deal could end up getting burned as the next haircut is likely to be more than 50 per cent.
"If hedge funds insist on driving an even harder bargain, they could lose even more in the end," he said.