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European Union leaders announced a write down of Greek bonds by 50%

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Re: European Union leaders announced a write down of Greek bonds by 50%

#21

Post by nandemo »

anigbrowl wrote: post #6
sliverstorm wrote: post #5

As someone not wholly familiar with government bonds, let me ask- does this mean that private creditors, aka individuals like you or I, are taking a 50% loss on investments? Or is this at a corporate or governmental level?

Both. Pension funds and the like often invest in government bonds; traditionally they're a safe investment used to hedge against riskier ones like stocks. With the latter you know there's no guarantee of performance, but you expect a risk premium in the firm of a dividend or accelerated growth. 'Bond' is another word for 'promise' so you should be able to rely on it. Saying that 'people knew the risks' of investing i…

Like ghshephard said, in general bonds aren't really risk-free.

"Risk-free" is a theoretical concept. Roughly speaking, it's an assumption used to simplify financial equations, analogous to assuming "no friction" in high-school physics problems when the friction coefficient is small enough.

The usual rationale for assuming that a country will always pay back its debts is that it can print its own currency at will. But this is not the case for the euro, since an individual member country cannot freely print euros. It's also not the case for dollar-denominated bonds issued by emerging countries. Indeed, even bonds issued by the two largest and more stable powers in the world (US and Japan) aren't 100% risk-free. They might be able to keep borrowing money and not defaulting, but likely at the cost of inflating their currencies, i.e, investors still get the nominal dollars and yen back, but they will be worth less in terms of goods. The closest thing to risk-free is an US Treasure bill.

Re: European Union leaders announced a write down of Greek bonds by 50%

#22

Post by furyg3 »

mc32 wrote: post #11

Great, so German's pay for the fiscal and political indiscretion of the Greeks. I guess they had little alternative as Greece was too big to fail -or, had they been allowed to default, The German people, via German bank investments in Greece,would have lost even more --seems they didn't learn much from our Wall Street banks and saddling die Volkes with the bag. Or do I have this wrong? I've been trying to follow this…

More like: German banks made a dumb loan to Greece, and now they have agreed to let Greece declare bankruptcy on 50% of those loans.

Re: European Union leaders announced a write down of Greek bonds by 50%

#23

Post by danmaz74 »

antimarketing wrote: post #4
bpolania wrote: post #3

It'd be interesting to see what happens next: will investors flee from Europe? Will the banks have enough to resist the loss? Must the ECB and the stability fund support banks holding greek debt? Will fear about default spread to Italy or Spain?

Basically everyone is waiting for Spain, Italy, Greece, Portugal, Ireland and Iceland to crash. None of them have, despite all the screaming and all of them will have to implode in their own sad ways, eventually. Thus, despite all the media talk about fear, drama and emotion people in the investment community are actually very unemotional and pragmatic and unfearful (I can not say they are courageuous now can I?) The…

If everybody was waiting for those countries to crash, nobody would be buying their debt, which is not the case. Moreover, Iceland already had its crash. Stop spreading FUD.

Re: European Union leaders announced a write down of Greek bonds by 50%

#24

Post by paganel »

antimarketing wrote: post #4
bpolania wrote: post #3

It'd be interesting to see what happens next: will investors flee from Europe? Will the banks have enough to resist the loss? Must the ECB and the stability fund support banks holding greek debt? Will fear about default spread to Italy or Spain?

Basically everyone is waiting for Spain, Italy, Greece, Portugal, Ireland and Iceland to crash. None of them have, despite all the screaming and all of them will have to implode in their own sad ways, eventually. Thus, despite all the media talk about fear, drama and emotion people in the investment community are actually very unemotional and pragmatic and unfearful (I can not say they are courageuous now can I?) The…

There's a thing I do not understand, nominally speaking French banks' exposure to Greek debt is not that large. I have not a easy link as reference, but I seem to remember reading in some of last week's FT editions that BNP Paribas had the highest exposure, with ~4 billion euros, followed by Societe Generale, with 2 or 3 billion. Of course that to you and me it looks like a lot of money, but the Kerviel case alone cost SG almost 5 billion euro in direct losses (not counting the losses incurred by the case on the share price), so Greece going down (or taking a 50% cut) shouldn't be that much of a tragedy, at least in theory.

Now, why then all this panic? It could because of what you said ("spread rumors, accumulate riches"), or because there's a hidden iceberg somewhere in these muddy waters: maybe countries like Italy and France are much closer to collapse than people think.

Re: European Union leaders announced a write down of Greek bonds by 50%

#25

Post by iwwr »

yxhuvud wrote: post #15

Incorrect title. This deal only cut down the debt hold by nongovernmental entities. The debt will be cut from 180% to 120%, roughly speaking. This restriction makes this deal a nothingburger.

Exactly, the IMF, the EC or other governmental bodies will still be paid in full. In effect, the bailout loans increased the private sector haircut by both delaying and also adding extra super-senior debt on top of the existing one.

Re: European Union leaders announced a write down of Greek bonds by 50%

#26

Post by nhaehnle »

mc32 wrote: post #11

Great, so German's pay for the fiscal and political indiscretion of the Greeks. I guess they had little alternative as Greece was too big to fail -or, had they been allowed to default, The German people, via German bank investments in Greece,would have lost even more --seems they didn't learn much from our Wall Street banks and saddling die Volkes with the bag. Or do I have this wrong? I've been trying to follow this…

When you think about it in terms of balance sheet vs. the real economy, the Germans' behavior is ridiculous. They build up tons and tons of net financial assets, some of which have been and are still liabilities of Greece. They insist on those assets being "paid back". But what does that mean, exactly?

It means that they are replaced by other financial assets. Why do they now insist that those other financial assets are no longer liabilities of Greece, but liabilities of somebody else? Who the hell knows. As long as everything is financial, it's just a silly numbers game.

You really have to ask yourself the question: Why do you build up net financial assets in the first place? Ultimately, that only makes sense if, at some point in time, you plan to exchange them for real assets.

But Germany (myself excluded) is hell-bent on ever increasing net exports. If they follow this policy, it means that Germany will never exchange net financial assets for net real assets, but will in fact continue to do the reverse.

If Germany stopped insisting on being a net exporter, and started to become a net importer instead, they could use their financial claims towards Greece to import real goods and services from there, and increase their own real standard of living. Germany could be happy, Greece could be happy. But ideology and confusion stands in the way.

It really is Kafkaesque.

Re: European Union leaders announced a write down of Greek bonds by 50%

#27

Post by patd »

paganel wrote: post #24
antimarketing wrote: post #4

Earlier quoted context omitted.

Basically everyone is waiting for Spain, Italy, Greece, Portugal, Ireland and Iceland to crash. None of them have, despite all the screaming and all of them will have to implode in their own sad ways, eventually. Thus, despite all the media talk about fear, drama and emotion people in the investment community are actually very unemotional and pragmatic and unfearful (I can not say they are courageuous now can I?) The…

There's a thing I do not understand, nominally speaking French banks' exposure to Greek debt is not that large. I have not a easy link as reference, but I seem to remember reading in some of last week's FT editions that BNP Paribas had the highest exposure, with ~4 billion euros, followed by Societe Generale, with 2 or 3 billion. Of course that to you and me it looks like a lot of money, but the Kerviel case alone co…

Maybe it's because other countries could follow the same path. Greece isn't that big but if the other PIIGS fail to pay, it could be much more than a few billions.

Re: European Union leaders announced a write down of Greek bonds by 50%

#28

Post by sasvari »

nknight wrote: post #16
_delirium wrote: post #13

Earlier quoted context omitted.

I'd consider this a bit of political and fiscal indiscretion of both Greeks and Germans, both relying on a similar moral hazard. German banks made stupid, risky loans, expecting that the EU wouldn't let anything go wrong, and would bail them out if it did go wrong; and Greek governments accepted the money, with the same expectations that the EU wouldn't let anything go wrong.

There's also, as I understand it, the matter of how Greece was permitted to join the Eurozone with, shall we say, overly optimistic economic reports that were blindly accepted under a set of rules that would warm a sub-prime lender's heart. Greece made quite the mess on its own, of course, but the number of ways in which the EU has further screwed the pooch are mind-blowing.

  [..] the matter of how Greece was permitted to join the
  Eurozone with, shall we say, overly optimistic economic
  reports that were blindly accepted [..]
I think this is one of the fundamental things about this whole crisis (concerning Greece). everybody knew that the Greece governments were very creative with their way of presenting their financial situations back to the seventies (or even longer), and everybody knew it when the decision was made to let them join the euro.

but nobody checked their balances, but only trusted the numbers the Greeks were serving and which everybody knew were kind of faked.

so in the end, the most ridiculous thing is that there never was a Plan B, or some kind of secret exit strategy. all the ones in charge of in the EU and its member states for more than a decade exactly knew that you can't trust the official numbers coming from the Greek peninsula, and nobody did a thing or thought of a plan to follow in the worst case scenario (which had to come one day)?

Edit: typo

Re: European Union leaders announced a write down of Greek bonds by 50%

#30

Post by _delirium »

miratrix wrote: post #20
_delirium wrote: post #10

Earlier quoted context omitted.

A large number of the holders (especially the foreign holders) bought the Greek bonds precisely because of the higher risk, which resulted in them having higher interest rates than, say, American or German bonds. They made a bet and lost.

Not quite true - Greek bonds did not have significantly higher interest rates than other Euro denominated bonds. Greek bond chart: http://www.bloomberg.com/quote/GGGB1YR:IND/chart German bond chart: http://www.bloomberg.com/quote/GDBR1:IND/chart Go back out 3 years, and you'll see that as late as December 2009, the yield spread was minor, and that it didn't start to really diverge until July of this year.

Hmm, that makes it somewhat puzzling that anybody bought Greek bonds at all. Was there any reason to prefer Greek bonds to German bonds, given the superior fiscal position of Germany and the greater liquidity of the German bond market?
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