The prospect of a hefty Greek government debt restructuring and writeoff has sent the bonds into a twilight zone that's attracting specialist distressed-debt traders more used to dealing with defaulted emerging sovereigns like Argentina.
Greece was ditched last year from developed country government bond indices that are typically tracked by the big, often conservative, global institutional funds.
But the fact that it's still not part of official emerging market indices means the debt is languishing in a sort of no-man's land that excludes funds reluctant to stray off their benchmarks -- a world occupied by only a few intrepid players such as hedge funds or private wealth managers.
Ahead of a make-or-break summit of European leaders on October 23 at which a comprehensive new Franco-German crisis plan is expected to be discussed, four euro zone officials told Reuters this week that losses of between 30 and 50 percent for Greece's private creditors were under consideration.
Even that would be a better deal than levels of a 60 to 70 percent haircut currently priced into Greek debt. Most Greek bonds are trading at around 35 cents on the euro.
For emerging market players with experience of Argentina, which defaulted on $100 billion in debt in 2002, Greece may still look a touch expensive but it's now in familiar territory.
If you looked at where Argentina bonds were priced after the 2002 crisis and up to the 2005 debt exchange, the whole curve was flat at about 25 cents to the dollar, so you could say Greece is getting to that level where as an emerging market investor you can think about buying, said Kevin Daly, emerging debt fund manager at Aberdeen Asset Management.
Investors would probably look to buy the cheapest Greek debt, the bond due to mature in 2040 which is currently trading at 31 to 32 cents on the euro, he said.
Argentina's debt experience is not a cheery one for Greece, which has a far larger $500 billion debt burden, suggesting the euro zone member may stay in the distressed debt zone for years to come.
Argentina carried out two debt exchanges in 2005 and 2010 but is still suffering challenges from hold-out investors, has failed to complete debt negotiations with the Paris Club of sovereign creditors and has not raised capital on international markets since the default.
An orderly restructuring of Greek debt would probably involve several Greek bonds being rolled into one large liquid bond that could be reasonably easily traded, analysts say.
This happened with the restructuring of Ukrainian state-owned Naftogaz' debt in late 2009, when Naftogaz called bondholders together and combined a Naftogaz bond that was technically in default with bilateral loans to form a larger new bond. The bond received a relatively warm reception from investors, relieved that the restructuring was not worse.
But a disorderly restructuring or a default would leave Greece's debt splintered into many illiquid issues, which would then attract the kinds of investors who focus on the more infrequently traded frontier emerging markets.
We have been trading some of the bonds at the moment and we would probably continue to do so, said Gabriel Sterne, economist at frontier markets broker Exotix.
The more disorderly it gets, the more frontier it gets.
Some funds, such as Distinction Asset Management, have been buying short-dated Greek debt in the hope of a short-term stay of execution for Greece, for instance if it gets the next tranches of its IMF loans.
That trade is getting shorter, Sterne said, as the outlook is getting bleaker.
If you are holding it till March 2012, it only takes a couple more IMF disbursements and you're there -- it's a calculated risk play for people with quite broad shoulders.
Greek debt and even other riskier debt markets are likely to plummet and initially show virtually non-existent trade in the case of default, as investors back off. The situation is comparable with a drying-up in emerging market liquidity in early 2009, during the global financial crisis.
But the debt could get a boost if the European Financial Stability Facility (EFSF) rescue fund buys it up.
Russia's recapitalization of its banks in 2009 enabled them to buy their own debt back at 50-60 percent of face value, kickstarting a recovery in emerging market debt.
The sell-off may offer some huge opportunities, which is what you got in 2009, said Luis Costa, emerging markets strategist at Citi. Before the recovery comes the storm -- we are trying to look beyond the pain threshold, though it is not going to be easy.
(Additional reporting by Mike Dolan, graphic by Scott Barber; Editing by Ruth Pitchford)