Ok, I give up: Who was dumb enough to have originally loaned Greece money?

[No Wikipedia Cites]

A recent article mentioned that those who hold Greece's debt paper will have to take a 'haircut' of 50% discount. Too bad so sad indeed, so that means whoever lent Greece money and bought their bonds will lose half of their investment.

Ok, I give up: Greece's problems are based on mathematics, too much outgo, too little income. But this wasn't a surprise and wasn't new, but was building up for awhile.

So, knowing that, who in the last 10 years, or even longer, was dumb enough to buy their bonds? I don't get it, why didn't they buy other bonds or investments? Even say German bonds, though maybe they pay much less, would be a better choice since they aren't tied to a mathematically impossible economy.

[Darth Panda]

John Corzine and Co (http://www.businessweek.com/news/2011-11-03/mf-global-has-customer-shortfall-of-633-million-cftc-says.html)

[scr4]

Ok, I give up: Greece's problems are based on mathematics, too much outgo, too little income. But this wasn't a surprise and wasn't new, but was building up for awhile.

Actually, some of it was a surprise because Greek had lied about its debts (http://www.dailymail.co.uk/news/article-1251280/Goldman-Sachs-new-storm-secret-deal-mask-Greek-debts.html).

[Exapno Mapcase]

Bonds are not a single thing. They should be thought off not as loans, but as investments. As investments they pay a return, supposedly a guaranteed return, which makes them far better investments than most businesses. (They may also be tax free, which essentially doubles their value.) However, even government bonds can on occasion go bad, so the amount of risk associated with them is reflected in the interest rate that they pay. The more risk, the higher the interest. This is to offset the investor for taking a riskier loan. (The highest risk and the highest payment ones are called junk bonds. Great if they survive; disaster if they don't.) Greece always issued bonds that paid higher interest than Germany or the U.S., which were so notoriously safe that the returns were minimal.

And of course everybody did buy other bonds and investments. You want to spread the risk around, so you develop a portfolio of very low risk, but low interest, bonds for safety and higher risk, higher interest, bonds for growth. Same with companies. And real estate. And everything else. That's how every investment firm on earth works. Which is why all of them, except for the most rigidly conservative, will find themselves in these situations every once in a while. It's worth it to pay for risk, but by definition you are taking a chance.

[Hari Seldon]

The Greeks were systematically (but not systematically enough) cooking their books. This was discovered by showing that the announced figures did not satisfy Benford's law. This "law" comes arises from many samples that show that in any natural series of numbers (e.g. the average debt load of a large number of people) about 30% of the numbers will start with 1, about 17% with a 2, ..., only 5% with a 9. It is an empirical law with consider theoretical basis.

[Demonocracy]

Check out who loaned the money to Greece at http://demonocracy.info/infographics/eu/debt_greek/debt_greek.html

Greek debt visualized & stacked in $100 euro bills

[suranyi]

There was just a Planet Money podcast this week on this very subject. It might still be available wherever NPR podcasts might be found.

[Little Nemo]

So, knowing that, who in the last 10 years, or even longer, was dumb enough to buy their bonds? I don't get it, why didn't they buy other bonds or investments? Even say German bonds, though maybe they pay much less, would be a better choice since they aren't tied to a mathematically impossible economy.As a general rule, higher risks produce higher yields. I would assume the people who were loaning Greece money were promised better interest then they would have gotten from Germany.

A few years ago, some investors might have recognized that Greece was facing long-term economic problems but were willing to risk some money on the assumption that its collapse would hold off long enough for them to collect on their loans.

[scr4]

There was just a Planet Money podcast this week on this very subject. It might still be available wherever NPR podcasts might be found.

I think you mean last week's This American Life episode "Continental Breakup" (http://www.thisamericanlife.org/radio-archives/episode/455/continental-breakup), produced by the Planet Money team. It's available as a free download for a few more days.

[jjimm]

Check out who loaned the money to Greece at http://demonocracy.info/infographics/eu/debt_greek/debt_greek.html

Greek debt visualized & stacked in $100 euro billsI know you're only a shill for your own website, but that is one of the best infographics I've ever seen.

[zombywoof]

I think you mean last week's This American Life episode "Continental Breakup" (http://www.thisamericanlife.org/radio-archives/episode/455/continental-breakup), produced by the Planet Money team. It's available as a free download for a few more days.

It was talked about on the Planet Money podcast as well, as suranyi said.

[nivlac]

PIMCO bought a lot of Greek bonds. It was not necessarily that dumb a move at the time. Who really knew that Greece was misrepresenting its financial situation when it joined the eurozone? Sure easy to see in hindsight, isn't it?

[septimus]

The Greeks were systematically (but not systematically enough) cooking their books. This was discovered by showing that the announced figures did not satisfy Benford's law.

Interesting. Do you have a cite? (I'm not doubting you, just surprised enough that it would seem fun to read about this.)

[suranyi]

I think you mean last week's This American Life episode "Continental Breakup" (http://www.thisamericanlife.org/radio-archives/episode/455/continental-breakup), produced by the Planet Money team. It's available as a free download for a few more days.

The Planet Money podcast was even more specific: They interviewed someone who had bought Greek bonds.

[Vicullum]

I know you're only a shill for your own website, but that is one of the best infographics I've ever seen.

Agreed. Although the one for US debt is pretty depressing.

[Telperion]

Agreed. Although the one for US debt is pretty depressing.

The thing that really boggles my mind is that the debt is higher than the amount of money that exists in the entire world. While I understand that most of it is only numbers on a computer screen, it just doesn't seem right to spend more money than there is.

[TriPolar]

While I understand that most of it is only numbers on a computer screen, it just doesn't seem right to spend more money than there is.

I've spent over 30 years trying to explain that to my wife.

[Doubting Robert]

I've spent over 30 years trying to explain that to my wife.

When you figure out how to explain that to her, please let me know.

Robert

[jjimm]

Agreed. Although the one for US debt is pretty depressing.Also I think the juxtaposition of a Boeing plane with the WTC is a little... tactless to say the least. Unless it's meant to be a subliminal message.

[scr4]

The Planet Money podcast was even more specific: They interviewed someone who had bought Greek bonds.

Ah, here it is (http://www.npr.org/blogs/money/2012/01/24/145757370/the-tuesday-podcast-who-loaned-money-to-greece-anyway). (I was behind on my podcasts and hadn't heard it till today.)

[Uber_the_Goober]

And people are brazen and arrogant enough to believe that we (humankind) can do anything to our own benefit. Haha! It'll be interesting to see this massive imaginary stack of debt come tumbling down in the years to come.

[DarrenS]

Interesting. Do you have a cite? (I'm not doubting you, just surprised enough that it would seem fun to read about this.)This (http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0475.2011.00542.x/abstract) seems to be the definitive paper, but it's paywalled. Googling for "Greece Benford's law" nets a few other articles.

[Ximenean]

As a general rule, higher risks produce higher yields. I would assume the people who were loaning Greece money were promised better interest then they would have gotten from Germany.
Yes, it's a bit like saying "who was dumb enough to bet on that horse that lost?" Greece was more risky, but the possible return was higher. On this occasion, it proved a bad bet, but what can you do?

I think what complicates it is that people bought bonds from Greece, the Euro member. That membership of the surely unbreakable currency union made Greece seem like a better bet than it actually turned out to be.

I don't think it was particularly "dumb" to buy that idea, a few years ago. Many decidedly not-dumb people accepted it.

[Baron Greenback]

Check out who loaned the money to Greece at http://demonocracy.info/infographics/eu/debt_greek/debt_greek.html

Greek debt visualized & stacked in $100 euro bills

That's a very nice infographic. Seeing as it's your site, a nitpick on one of the quotes - Josiah Stamp was a director of the Bank of England, not its President, a position that doesn't exist. The head of the BofE is Governor.

[DarrenS]

Hindsight is 20/20 vision. Sure it was risky, but all investments carry some risk. If things had turned out the opposite way, we'd be saying, "Man...why didn't I have the sense to invest in Greece? I could be rich by now."

[TriPolar]

Hindsight is 20/20 vision. Sure it was risky, but all investments carry some risk. If things had turned out the opposite way, we'd be saying, "Man...why didn't I have the sense to invest in Greece? I could be rich by now."

I think the problem is that no one actually thought it would turn out the opposite way.

[jjimm]

That's a very nice infographic. Seeing as it's your site, a nitpick on one of the quotes - Josiah Stamp was a director of the Bank of England, not its President, a position that doesn't exist. The head of the BofE is Governor.In other words "Governor of the Bank of England" is the full title.

Another nitpick: you have the 'Greece' caption at the top of the US page.

[dracoi]

I am indirectly an investor in Greek bonds, via an ETF that invests in all sorts of high-risk (read: junk) bonds. (Of course, my total exposure to Greece specifically is minimal; that's why I picked an ETF. Investing across many bad bets seems safer than doubling down on particular one.)

I invest in this fund as part of my diversification strategy - it is more risky than the safe part of my bond portfolio, but still safer than some of my stocks. In my mind, it fills a necessary gap.

This ETF pays approximately 7.5% interest. I understand that I'm getting that higher payout at the risk of losing some or all of my principal, but that's investing. (For what it's worth, the principal value of the ETF has gone down 1%. Over 18 months, I'm still about 10% up on this ETF between reinvested dividends and principal appreciation).

With the S&P doing essentially 0% through all of 2011, I'm feeling pretty smug about my choices right now. In fact, my total portfolio gained 6.25% in 2011.

I made a similar risky gamble when I put $1,800 into AIG's bonds in December 2008. Those bonds paid me $180/year in interest and cashed out at their $3,000 face value in 2011. So that's a gain ($1,740) of almost 100% over three years on a bond. With AIG, I was gambling that the US government would just keep pouring money into them until I could cash out. I was right. Now that I'm out, I couldn't care less where AIG winds up eventually.

You can see how the same thinking might be applied to Greece.