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.
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.
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.
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.
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?
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.