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Comment by biehl | Hacker News Reader

Banks have (eagerly) bought bonds for 100 EUR from Country A (that considering the risk inherent in the high public levels of debt of country, clearly were not worth more than 30-40 EUR).

Now there is a crisis, and the unsustainability of the public debt of country A is undeniable to everyone, so no-one will buy the bonds, well maybe for 5 EUR. However, through lobbying etc. a deal is struck so that Country B lends Country A 60 EUR to buy the bonds for the artificially high price of 53 EUR, thereby allowing the banks to escape the full writedown from 100 EUR to 5 EUR, but pushing 48 EUR of unrealized bankers loss onto the public books of Country A (debtor) and Country B (creditor).

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I'm sorry, but this is a ridiculous way to think! You give me 100 Euros that I promise to repay later. When "later" comes, I refuse to pay. My brother finds this humiliating and to protect the family name buys the debt from you for 10 Euros. Should I now be able to say to him "Hey, a smart hedge fund would have only paid 1 Euro for this debt - you pushed 9 Euros of book losses on me, that I had nothing to do with! I'm getting taken advantage only to save the family name!"

Nevermind the theoretical principles involved, the actual numbers are quite different from what you probably believe: All in all, around 200 Billion Euros of private creditor debt was restructured:

1) 107 Billion Euros were simply written off

2) 62,4 Billion Euros of old private bonds were exchanged into new private bonds

3) Only 29,7 Billion Euros were paid out to private creditors and shifted onto the books of other Eurozone governments.

I am sorry that you think it is ridiculous. However, it is the only reasonable way to think about bonds. They are not safer than a risk of default, and the spread between bonds expresses exactly this (relatively). If bankers buy at a high price (low spread) when clearly they should not have bought at that price they are simply poor investors. No one forced them to buy - they could, and should, have bought something else.

I don't see we disagree about the numbers? Of the 200 Billion, only about half of the losses were realized. The rest was pushed onto public books (as new bonds or as bailout-loans).

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