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>As happened in Greece Greece had the largest default in history[0], virtually all private debt holders were forced to take a ~70% haircut. [0]: https://en.wi

>As happened in Greece Greece had the largest default in history[0], virtually all private debt holders were forced to take a ~70% haircut. [0]: https://en.wikipedia.org/wiki/Private_sector_involvement https://en.wikipedia.org/wiki/Private_sector_involvement

Retric 9y ago
That 'haircut' is based on interest assumptions not actual costs. The actual haircut was only 53.5% of the face value so if you bought it from someone else at a higher discount you made significant profit. Assuming you sold it or there will be no second default.
- pyvpx 9y ago
  I humbly suggest reading the book "Debt: The First 5000 Years"
- jessriedel 9y ago
  Sorry, are you saying that if a bond is supposed to pay a certain interest which isn't actually paid, that this isn't a partial default because the interest is only an "assumption"? And we should only count the face value of the bond?
  - ant6n 9y ago
    I think the point is more that by the time the default happened, the market already considered the bonds to be worth less then what they ended up being worth.
    - jessriedel 9y ago
      The fact that the market priced in the haircut does not mean there was no haircut. It just distributes the loss between different creditors. The bonds are just as much in default, representing a net transfer from creditors to borrowers.
- Spooky23 9y ago
  I'm all for knocking on predatory bankers, but that's not a very compelling argument. The borrower sold a bond at par -- so they got their $1. As the entity who bought that bond, you're fucked... the borrower isn't making interest payments and the debt is looking like a bad debt. So you sell it at a distressed value, in your example $0.53, losing half your principal investment + interest, to cut your losses. The entity buying the distressed asset knows it's junk, which is why they buy it at a steep discount. The fact that they may make a significant profit if the borrower starts making payments is irrelevant. At this point people start whining about predatory Goldman Sachs, etc. Notice that there was no outcry when places like Greece and Venezuela were happily borrowing and squandering money based on German credit (Greece) or temporarily inflated oil revenues (Venezuela). In the case of Venezuela, they managed to also kill the golden goose by deferring critical investments in oil infrastructure and making dumb political decisions.
  - Retric 9y ago
    Goldman Sachs has not and is not lending Venezuela any money. So, if they buy a bond from someone else at less than face value they have zero room to complain about an agreement that was not made with them. At best they are trying to make a quick buck off the person that sold them the bond and again have no room to talk with the issuer.
    - whatok 9y ago
      The bond indenture kinda disagrees with your whole premise here.
      - Retric 9y ago
        Suppose, I buy a bond at 5% interest over 1 year and it defaults after making most of the payments. If I effectively only get 1% interest the IRS says I still owe taxes on that 1% as profit.
        whatok 9y ago
        I don't understand what that has to do with your original premise.
netsharc 9y ago
Except, it has not defaulted to the ECB, Eurozone or IMF... these institutions are insane, when asked "We owe you x billion dollars at the end of the month. We can either pay you or pay our pensioners. What should we do?", the answer was, "Well, pay us!".

Retric 9y ago

That 'haircut' is based on interest assumptions not actual costs. The actual haircut was only 53.5% of the face value so if you bought it from someone else at a higher discount you made significant profit. Assuming you sold it or there will be no second default.

pyvpx 9y ago
I humbly suggest reading the book "Debt: The First 5000 Years"
jessriedel 9y ago
Sorry, are you saying that if a bond is supposed to pay a certain interest which isn't actually paid, that this isn't a partial default because the interest is only an "assumption"? And we should only count the face value of the bond?
- ant6n 9y ago
  I think the point is more that by the time the default happened, the market already considered the bonds to be worth less then what they ended up being worth.
  - jessriedel 9y ago
    The fact that the market priced in the haircut does not mean there was no haircut. It just distributes the loss between different creditors. The bonds are just as much in default, representing a net transfer from creditors to borrowers.
Spooky23 9y ago
I'm all for knocking on predatory bankers, but that's not a very compelling argument. The borrower sold a bond at par -- so they got their $1. As the entity who bought that bond, you're fucked... the borrower isn't making interest payments and the debt is looking like a bad debt. So you sell it at a distressed value, in your example $0.53, losing half your principal investment + interest, to cut your losses. The entity buying the distressed asset knows it's junk, which is why they buy it at a steep discount. The fact that they may make a significant profit if the borrower starts making payments is irrelevant. At this point people start whining about predatory Goldman Sachs, etc. Notice that there was no outcry when places like Greece and Venezuela were happily borrowing and squandering money based on German credit (Greece) or temporarily inflated oil revenues (Venezuela). In the case of Venezuela, they managed to also kill the golden goose by deferring critical investments in oil infrastructure and making dumb political decisions.
- Retric 9y ago
  Goldman Sachs has not and is not lending Venezuela any money. So, if they buy a bond from someone else at less than face value they have zero room to complain about an agreement that was not made with them. At best they are trying to make a quick buck off the person that sold them the bond and again have no room to talk with the issuer.
  - whatok 9y ago
    The bond indenture kinda disagrees with your whole premise here.
    - Retric 9y ago
      Suppose, I buy a bond at 5% interest over 1 year and it defaults after making most of the payments. If I effectively only get 1% interest the IRS says I still owe taxes on that 1% as profit.
      - whatok 9y ago
        I don't understand what that has to do with your original premise.

netsharc 9y ago

Except, it has not defaulted to the ECB, Eurozone or IMF... these institutions are insane, when asked "We owe you x billion dollars at the end of the month. We can either pay you or pay our pensioners. What should we do?", the answer was, "Well, pay us!".