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Comment by sliverstorm | Hacker News Reader

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?

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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.

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.

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.

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.

'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.

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?

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

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?

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