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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%

#41

Post by [deleted] »

arethuza wrote: post #34
sasvari wrote: post #28

Earlier quoted context omitted.

[..] 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 government s were very creative with their way of presenting their financial situations back to the seventies (or even longer), and everybody knew…

Isn't that rather similar to the subprime mortgage fiasco - everyone "knew" that there were stacks of mortgages that were worthless, but everyone continued regardless.

[deleted]

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

#42

Post by anamax »

nhaehnle wrote: post #26
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…

> Why do they now insist that those other financial assets are no longer liabilities of Greece, but liabilities of somebody else?

Because they think that the other party is more likely to live up to its obligations than Greece.

It's pretty clear that it's better to be owed $1 by the German govt than by the Greek govt. However, it is probably better to be owed $1 by the Greek govt than to be owed $0.10 by the German govt.

Somewhere between those points, there's an equilibrium.

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

#43

Post by nhaehnle »

anamax wrote: post #42
nhaehnle wrote: post #26

Earlier quoted context omitted.

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…

> Why do they now insist that those other financial assets are no longer liabilities of Greece, but liabilities of somebody else? Because they think that the other party is more likely to live up to its obligations than Greece. It's pretty clear that it's better to be owed $1 by the German govt than by the Greek govt. However, it is probably better to be owed $1 by the Greek govt than to be owed $0.10 by the German g…

The thing is, as long as you never intend to redeem your financial assets for real goods, it really doesn't matter. Let's say Germany as a nation holds financial claims on Greece denominated as X€. If, as a nation, they intend to continue running net exports, this means that those financial claims never need to be redeemed. If the assets are in the form of e.g. 10 year bonds, then Germany could just exchange them for new 10 year Greek bonds at maturity. So long as Germany and Greece both accept the game, their will never be any problem of insolvency.

This rollover game could continue indefinitely. That's my whole point. It would only have to stop if, at some point, Germany decides that it wants to become a net importer, which is equivalent to running down net financial claims against other countries. Then at some point they would want to reduce the amount of financial claims against Greece, and Greece would have to cancel their liabilities, ostensibly by sending real goods to Germany. The point is, however, that the German elite is totally hell-bent on staying a net exporting country forever.

Of course, this is not what happens, because micro economics is different from macro economics. The micro actors behave like you explain, and their behavior is perfectly reasonable from their individual point of view (well, except that it is totally unreasonable for non-capitalist Germans to be in favor of net exports, but they have no say in the matter at the moment). However, on the macro level, this creates behavior that is quite literally schizophrenic.

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

#44

Post by anigbrowl »

ghshephard wrote: post #8
anigbrowl wrote: post #6

Earlier quoted context omitted.

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…

Sovereign Debt is most certainly not "Risk Free." I'm not sure that the Greek Bond Default is particularly meaningful - and is certainly not a very big deal. The market had anticipated (and priced in) this default almost six months ago. It was a big deal _then_ but it's been a foregone conclusion for most of the year. If anything - the deal negotiated here is probably showing some upside to what was expected, so this…

I'd say six months of agonized indecision over what the outcome will be is most certainly a big deal. If the markets had fully priced this in, then they wouldn't be swinging around wildly while the EU vacillates. Sure, they're volatile because they're trying to guess how this will ripple out to affects other heavily indebted European economies such as Italy, Spain and so on. But the fact is that nobody knows what size haircut the Greek bondholders are being expected to take, which makes pricing more or less impossible unless one assumes it will be 100% and treats anything less as a windfall.

No asset class is completely risk-free, and bonds are no exception. The yield on a bond is meant to be reflective of its risk factor. But in practice, sovereign debt default is rare and the yield so low that buying bonds is equivalent to leaving your money in the bank - a riskier proposition in some countries than others, but an inherently conservative investment all the same. In absolute terms, they're risky, but so is putting your money under the mattress. In relative terms, they're the investment equivalent of the savings account: nobody buys bonds in a politically stable country with the expectation of losing money on the deal, they buy them to keep pace with inflation.

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

#45

Post by anigbrowl »

hopeless wrote: post #29

Greece has it's government bonds written down by 50% but next week the Irish government is due to pay €700m to un-guaranteed senior bondholders in Anglo Irish Bank (one of our zombie banks). It beggars belief.

Yes, but the yield on Irish 10 year government bonds is 6.09%, while Greece is paying 7.82%. After that payment takes place the coupon on Irish bonds will go down, possibly under 6%.

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

#46

Post by ghshephard »

anigbrowl wrote: post #44
ghshephard wrote: post #8

Earlier quoted context omitted.

Sovereign Debt is most certainly not "Risk Free." I'm not sure that the Greek Bond Default is particularly meaningful - and is certainly not a very big deal. The market had anticipated (and priced in) this default almost six months ago. It was a big deal _then_ but it's been a foregone conclusion for most of the year. If anything - the deal negotiated here is probably showing some upside to what was expected, so this…

I'd say six months of agonized indecision over what the outcome will be is most certainly a big deal. If the markets had fully priced this in, then they wouldn't be swinging around wildly while the EU vacillates. Sure, they're volatile because they're trying to guess how this will ripple out to affects other heavily indebted European economies such as Italy, Spain and so on. But the fact is that nobody knows what siz…

^VIX is down 14% to 25.51 as of 12:25 Pacific - The Greek Bond Default is, today, widely seen as a positive step.

I agree with you that, two years ago, Bond (or, for that matter, Municipal or state bonds in the US) debt in politically stable countries was seen as very low risk.

But, in 2006, Real Estate was seen as a safe investment as well. In fact, I was openly mocked, not just debated, but mocked, as being uneducated and unsophisticated when I tried to draw parallels with the US Real Estate Market and what had happened in Japan, just 10 years earlier, in attempting to suggest that perhaps Real Estate doesn't "Always go up."

If the last 4-5 years has taught us anything, it's that there is risk in everything. One of the few bastions that still seems to remain standing is people's belief in the FDIC, and the fact that if they put their money in a US Bank, that they are protected up to $250,000.

People need to realize that there are no "Risk Free" investments, that everything has a chance of default. People need to start relying on Capital Asset Pricing Models (CAPM), and diversifying their investments across a broad portfolio - including hard stock such as land, livestock, and shelter. This is the only rationale response in the face of default risk that we are surrounded by - and the sooner we start practicing that consistently, the sooner we will become more resilient as a society.

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

#47

Post by anamax »

nhaehnle wrote: post #43
anamax wrote: post #42

Earlier quoted context omitted.

> Why do they now insist that those other financial assets are no longer liabilities of Greece, but liabilities of somebody else? Because they think that the other party is more likely to live up to its obligations than Greece. It's pretty clear that it's better to be owed $1 by the German govt than by the Greek govt. However, it is probably better to be owed $1 by the Greek govt than to be owed $0.10 by the German g…

The thing is, as long as you never intend to redeem your financial assets for real goods, it really doesn't matter. Let's say Germany as a nation holds financial claims on Greece denominated as X€. If, as a nation, they intend to continue running net exports, this means that those financial claims never need to be redeemed. If the assets are in the form of e.g. 10 year bonds, then Germany could just exchange them for…

> The point is, however, that the German elite is totally hell-bent on staying a net exporting country forever.

That goal doesn't imply that it's reasonable for them to simply "give away" the value of that surplus, let alone for them to give away in excess of that surplus for any period of time. The latter is important because some of the bailout proposals have germany giving up multiple years of export surplus.

In addition, some of the proposals seem to be both giving up on Greek debts owed to Germany (and/or German banks) and taking on debts owed to others.

Note that the surplus does give Germany some power, so it isn't just bits on a disk.

> So long as Germany and Greece both accept the game, their will never be any problem of insolvency.

Another problem is that admiting to that game is (for Germany) admitting to being a sucker. While Germany may, in fact, be a sucker, admitting it is a very different thing.

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

#48

Post by anigbrowl »

ghshephard wrote: post #46
anigbrowl wrote: post #44

Earlier quoted context omitted.

I'd say six months of agonized indecision over what the outcome will be is most certainly a big deal. If the markets had fully priced this in, then they wouldn't be swinging around wildly while the EU vacillates. Sure, they're volatile because they're trying to guess how this will ripple out to affects other heavily indebted European economies such as Italy, Spain and so on. But the fact is that nobody knows what siz…

^VIX is down 14% to 25.51 as of 12:25 Pacific - The Greek Bond Default is, today, widely seen as a positive step. I agree with you that, two years ago, Bond (or, for that matter, Municipal or state bonds in the US) debt in politically stable countries was seen as very low risk. But, in 2006, Real Estate was seen as a safe investment as well. In fact, I was openly mocked, not just debated, but mocked, as being uneduca…

I think we agree about these things; you're quite right that 'risk-free' is an inherently complacent evaluation, and that even the FDIC is only as good as the resolve of a majority of politicians to stand behind the government's promises (something that's increasingly questionable these days).

I don't fully agree with you about CAPM. Not about it being the smart strategy, but about everyone needing to practice it. I enjoy economics as a hobby but actually doing CAPM evaluations makes my head hurt. It's not realistic or even productive to expect everyone to be an economist. I'm studying law, and while I think life would be an awful simpler if everyone else knew more law and thought like a lawyer, the fact is that most people don't find it all that interesting and it's more rational for them to outsource their legal problems to a legal nerd in most cases. I'm probably interpreting 'people' in a much broader sense than you meant it; it just strikes me that our aggregate productivity is to some extent dependent on the trustworthiness and prudence of our institutions, and it's not irrational to want an institutional framework that rewards fiscal prudence so as to make time available for other activities.

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