European Union leaders announced a write down of Greek bonds by 50% | Hacker News Reader

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

money.cnn.com

56 pointsbpolania46 comments

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.

The article says 150% not 180%.

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.

I have this theory, see, about the delays.

The longer the delays have gone on, the more the Greek government has had to actually implement austerity measures - the more political capital those who want to see austerity and proper financial liberalization have had to force those through...

So by the time some breathing room has been introduced, Greek society has undergone the necessary but painful changes towards a better long-term solution.

If the bailout loans didn't come then, then Greece would have had to negotiate a debt restructuring then rather than now, gaining 1-2 years at least.

As for austerity, there is the healthy streamlining and downsizing of public expenses and there is the hobbling of the private sector with new and higher taxes. The latter solution merely sinks the Greeks further.

Public debt is not strictly meant to be paid off ever, but it should grow no faster than the overall economy for this indefinite deferral to work. It also means the productive aspect of society, namely the private sector, not be hindered by too high taxes or regulations.

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%.

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 a bit..

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

Since this is so obvious to everyone, the logical conclusion seems to be that things worked out exactly as planned for somebody. I know, "never attribute to malice" etc., but the pattern of banks encouraging non-creditworthy entities to pig out on debt, leading to their devastating and unceremonious bankruptcy a few miles down the road seems very common by now.

I am not well versed enough in finance to speculate on who gains and how in these scenarios, but it seems like too much of a lock-in to be 'accident'. I know that in the past, nations and the IMF used loans and defaults to influence policies of other countries, could it be something like that going on here? Default as a way to force spending cuts and other political changes?

If there are 147 entities controlling 40% of the global financial market, this is not that far-fetched.

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.

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.

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.

> 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.

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.

> 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.

"pay for the fiscal and political indiscretion of the Greeks"

- what about -

"pay for the massacres back in the 40's"

[http://en.wikipedia.org/wiki/List_of_massacres_in_Greece]

And it's more like loaning so that the Greeks may afford to buy their high quality products.

Totally, totally irrelevant - not only did greece benefit from a free handout because this happened (the Marshall Plan), or that it received 4.4 billion euros in reparations for the war from Germany, or that the number of relevant deaths listed on your source is equivalent to only about 6 years' worth of Greek road fatalities - but that is an entirely different generation's mistake

when it comes down to money/business nothing is irrelevant :D

edit: bah! The truth always hurts :C

I believe the bond market was discounting them at a much higher rate than that. But at least it's a good start, recognising the actuality of the situation rather than the fantasy.

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 problem is that all of the above countries are still stuck in economic bubbles, yes the bubbles are not as rosy but they are in bubbles still — partly to keep American, British and French banks safe (who are the largest other party to all the debt that these countries have taken), partly because the populations there love to delude themselves.

Investors will get back into Europe after the crash to buy on the cheap — almost everybody is as cunning as a fox these days, nobody buys when the price is percieved to be too high, because of the abudance of information.

These types of investors are small guys like you & me, sovereign wealth funds.

However, there is an another type of investors who look for even a bigger score. Obviously, the counterweight to buying on the cheap in Europe is that a lot of banks in the U.S., British and France will be up for grabs as well.

To give you an example of how these other type of investors operate — you might not have noticed but there was a lot of noise during this late summer from the controlled alternative media, such as Zerohedge and even your trusty old charlatan Alex Jones and from rumours on the trading floor about Societe Generale being on the verge of a collapse — these rumours were magnified until the moment that S.G. turned to the Rothschilds in France for help and guardianship — then suddenly everything stopped. Heheee.... somebody is beginning to take control of the banks on the cheap.

The funny part is that the Rothschilds are not as rich as people claim or think they are — there have been a lot of people in the U.S. who are richer than them in terms of net worth, however they just manage affairs by spreading rumours and perception better than you or I can or that glamorous, over-the-top big, soverign wealth fund ever can — connections, connections.

I mention this as an example to conclude that there are two types of investors, the ones who are waiting for the big crash and the ones who are trying to manipulate through the anxiety and rumours prior to the big crash.

But nobody is particularly scared of anything as far as things go. Everybody is preparing themselves, like F1 cars for the start of the race. A game of nerves, perhaps but not of emotions if you know what I mean.

References, before you judge me:

[1] http://online.wsj.com/article/BT-CO-20110823-709045.html [2] http://www.latribune.fr/entreprises-finance/banques-finance/...

Are you sure this applies to Iceland? My understanding is they've had their crash and are cleaning up from it.

Iceland crashed but they also declared default for all the foreign debt at the same time. As Iceland is very small, the effects were negligible for the foreigners. The effect was also a devaluation of the ISK because of the lost of trust in the country/currency:

http://www.xe.com/currencycharts/?from=ISK&to=EUR&vi...

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.

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.

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.

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 in bonds misses the point: they're supposed to be risk-free, so bond default is a very big deal.

'Bond' is another word for 'promise' so you should be able to rely on it... they're supposed to be risk-free

Agreed. I'd be livid right about now if I held Greek bonds. Although I suppose anyone looking for shelter in the form of government bonds could have taken the next step and diversified across nations, further reducing their exposure.

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.

Oh, I see. I was not aware of that.

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?

Is this comparable to an organised default? If the Greek government had instead defaulted on its bonds and the price naturally fallen to 50% of the original, would the effects have been similar?

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 form of default is actually positive news - akin to a company showing a drop in profits, but less of a drop than what wall street expected.

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.

^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.

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.

> Saying that 'people knew the risks' of investing in bonds misses the point: they're supposed to be risk-free

Given the fact that bonds regularly default, I'm not sure how any sane investor could consider them risk-free. If they were, every bond would trade at identical yields, equal to the risk-free rate of return.

Actually, until the financial crisis, all European bonds were considered to be the same risk, and were priced pretty close to the same. That was one of the reasons why Greece could load up on so much debt at good interest rates.

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.

Individuals who directly hold Greek bonds aren't affected, because it's structured as a "voluntary" agreement between several large bond-holders, the European Central Bank, and Greece. Only bondholders in that group agreed to accept a 50% lower repayment, so if you personally own some Greek bonds in your brokerage account, they haven't yet defaulted. However, if you own the bonds via a fund where the bonds themselves are owned by a bank in the group, you would be affected.

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