6 ms·

Markets are pricing greek debt as defaulted because it's the most rational thing for the greeks to do, and the most rational outcome. Greece holds power over th

by fleitz 15y ago

Markets are pricing greek debt as defaulted because it's the most rational thing for the greeks to do, and the most rational outcome. Greece holds power over the EU to the degree that its financial insolvency can bring the whole system down. (Technically, it's a power transfer from the EU to US as the fed has already bailed out the EU banks in anticipation of the Greek default) When you owe the bank $1 million the bank owns you, when you owe the bank $469 billion, you own the bank. The average greek is smart enough to know this and knows that the closer they get to default the better the deal they will get. The banks have two options, get nothing, or get something. Also, if the Greeks' can't pay at a AAA rating they certainly can't pay at AA rating, nor A, not BB, so the end game for rational thinkers is default because as the rating drops the inability to pay increases. Since Greeks hold EU notes and EU denominated assets they can't even be screwed via an exchange rate mechanism. If Greece defaults Europe basically has to eat it, and it puts Europe in a much worse negotiating position with Spain and Portugal. Furthermore, with regard to bond pricing there is no such thing as a bad bond, only a bad price, hence they are quickly being priced to zero. It's similar to the whole subprime thing, guys who bought subprime post Aug 2008 actually did alright because the prices were so low that you'd be somewhat likely to get your money back.

fleitz 15y ago
As a side note a 2 year Greek T-bill pays 26%, at that rate Greece would be better off phoning up Capital One for a VISA.
- ignifero 15y ago
  Although, since at the moment greece borrows from emergency sources, one can't be sure how representative the price is (up or down)
- redthrowaway 15y ago
  Inflation in Greece is currently sitting at 4.5%, so the T-bills are essentially offering a real 8.5%/year ROI. How on Earth is that affordable to them? I get that they need money now, but they can't expect to be in a better position to repay in 2 years. Also, what happens if (when) Greece defaults? Do the T-bills become worthless, or are they considered a different kind of debt than other national debts?
  - rmc 15y ago
    How on Earth is that affordable to them? I get that they need money now, but they can't expect to be in a better position to repay in 2 years. They aren't actually paying that. Since the EU/ECB/IMF gave them all that money they have a nest egg and don't have to go to the market and sell more bonds. AFAIK the 26% is from secondary sales, people who bought a bond before and now, in order to sell it on, have to offer a high rate. However if the EU/ECB/IMF money runs dry, and they need to go back to the bond market, then this is the rate they would pay. As you said, that's impossible. So if the EU/ECB/IMF money runs dry, they'll default.
- bd_at_rivenhill 15y ago
  Does anybody know how an individual investor could actually buy one of these?
  - sootzoo 15y ago
    well, us mere mortals will have to stick to international treasury ETFs like BWX or fear plays like good old GLD/VIX. even if you could directly invest in greek bonds, you probably would not want to do this...
  - fleitz 15y ago
    Keep in mind that there is no chance in hell that a 2 year bond will actually pay that, they'll default before then, but if you really want to, get one from a primary dealer. http://www.pdma.gr/(S(fcxze5rfyjyze2555hw43555))/ODDHX/StaticPage1.aspx?pagenb=465 http://www.pdma.gr/(S(fcxze5rfyjyze2555hw43555))/ODDHX/Stati... Treasury bonds are actually really easy for a retail investor to buy.
- AlexMuir 15y ago
  They called Capital One in 2008 but they're still on hold. It's a race to get through to Card Sales before the phones get disconnected.
nopinsight 15y ago
To retaliate against this, can't the EU threaten to kick Greece out of its system while force-converting all their EU-denominated assets into a newly setup Greek currency. (We can view this as the default of their agreement to support Greece--in response to the Greek refusal to pay off its debt.) The new currency will immediately weaken significantly, basically forcing austerity measures onto the whole economy. When the Greeks are on their own, without having EU as their sugar daddy, they will have to absorb (or receive) the direct consequences of their actions--whichever fiscal/monetary path they choose to follow. The technical issues of force-conversion of currency their assets are denominated in are probably quite immense, but it is better than losing hundreds of billions of dollars. Moreover, if it can be done, all other troubled economies in Europe will have much greater incentives to follow any rules set up by the EU.
- wisty 15y ago
  There's no mechanism, so it would probably need some sort of vote. This would take too long, and the plan would probably leak, so the Greeks would have time to cash out all their EU assets.
  - nopinsight 15y ago
    If the EU coordinates with the US, Japan, and all larger economies (perhaps via IMF), couldn't they still force Greek out of any currency their assets are cashed out into? The incentives of other countries to go along is the prevention of contagion economic depression. Of course, Greece could still convert them into a currency not controlled by this coalition (Zimbabwean dollar? ;-)), but small currencies in this role cannot support Greek economic downfall and will be significantly affected by Greek economic results. This will still accomplish the goal of getting Greece to take responsibility for their economic decisions. (If the only choices are smaller currencies, Greece will probably choose to set up their own currency instead.)
- sprovoost 15y ago
  That's probably exactly what the greeks would want, except they would add one step to this: default on foreign debt. With a weaker currency they would be very competitive and with 0 debt even more so. It's pretty risky though: 1 - the EU and others could erect trade barriers after such a default 2 - the rest of the EU could collapse with them, which means they won't be buying much stuff either
Uchikoma 15y ago
If Greece defaults, it will go down the drain badly. They will not get out of this as good as Argentina did. With no significant exports (that the EU doesn't pay for with subsidies) and living from subsidies and dept over the years, there is no chance for progress. With real riots in Greece, Spain and Portugal will think twice. This will get Spain and Portugal get their job done, not giving Greece more money. That said, the best would be to inject more money beside the debt into Greece to start some recovery. Given, Greece did cheat on the EU in the past concerning EU money, nevertheless this should get out Greece faster.

by fleitz 15y ago

fleitz 15y ago

As a side note a 2 year Greek T-bill pays 26%, at that rate Greece would be better off phoning up Capital One for a VISA.

ignifero 15y ago
Although, since at the moment greece borrows from emergency sources, one can't be sure how representative the price is (up or down)
redthrowaway 15y ago
Inflation in Greece is currently sitting at 4.5%, so the T-bills are essentially offering a real 8.5%/year ROI. How on Earth is that affordable to them? I get that they need money now, but they can't expect to be in a better position to repay in 2 years. Also, what happens if (when) Greece defaults? Do the T-bills become worthless, or are they considered a different kind of debt than other national debts?
- rmc 15y ago
  How on Earth is that affordable to them? I get that they need money now, but they can't expect to be in a better position to repay in 2 years. They aren't actually paying that. Since the EU/ECB/IMF gave them all that money they have a nest egg and don't have to go to the market and sell more bonds. AFAIK the 26% is from secondary sales, people who bought a bond before and now, in order to sell it on, have to offer a high rate. However if the EU/ECB/IMF money runs dry, and they need to go back to the bond market, then this is the rate they would pay. As you said, that's impossible. So if the EU/ECB/IMF money runs dry, they'll default.
bd_at_rivenhill 15y ago
Does anybody know how an individual investor could actually buy one of these?
- sootzoo 15y ago
  well, us mere mortals will have to stick to international treasury ETFs like BWX or fear plays like good old GLD/VIX. even if you could directly invest in greek bonds, you probably would not want to do this...
- fleitz 15y ago
  Keep in mind that there is no chance in hell that a 2 year bond will actually pay that, they'll default before then, but if you really want to, get one from a primary dealer. http://www.pdma.gr/(S(fcxze5rfyjyze2555hw43555))/ODDHX/StaticPage1.aspx?pagenb=465 http://www.pdma.gr/(S(fcxze5rfyjyze2555hw43555))/ODDHX/Stati... Treasury bonds are actually really easy for a retail investor to buy.
AlexMuir 15y ago
They called Capital One in 2008 but they're still on hold. It's a race to get through to Card Sales before the phones get disconnected.

nopinsight 15y ago

To retaliate against this, can't the EU threaten to kick Greece out of its system while force-converting all their EU-denominated assets into a newly setup Greek currency. (We can view this as the default of their agreement to support Greece--in response to the Greek refusal to pay off its debt.) The new currency will immediately weaken significantly, basically forcing austerity measures onto the whole economy. When the Greeks are on their own, without having EU as their sugar daddy, they will have to absorb (or receive) the direct consequences of their actions--whichever fiscal/monetary path they choose to follow. The technical issues of force-conversion of currency their assets are denominated in are probably quite immense, but it is better than losing hundreds of billions of dollars. Moreover, if it can be done, all other troubled economies in Europe will have much greater incentives to follow any rules set up by the EU.

wisty 15y ago
There's no mechanism, so it would probably need some sort of vote. This would take too long, and the plan would probably leak, so the Greeks would have time to cash out all their EU assets.
- nopinsight 15y ago
  If the EU coordinates with the US, Japan, and all larger economies (perhaps via IMF), couldn't they still force Greek out of any currency their assets are cashed out into? The incentives of other countries to go along is the prevention of contagion economic depression. Of course, Greece could still convert them into a currency not controlled by this coalition (Zimbabwean dollar? ;-)), but small currencies in this role cannot support Greek economic downfall and will be significantly affected by Greek economic results. This will still accomplish the goal of getting Greece to take responsibility for their economic decisions. (If the only choices are smaller currencies, Greece will probably choose to set up their own currency instead.)
sprovoost 15y ago
That's probably exactly what the greeks would want, except they would add one step to this: default on foreign debt. With a weaker currency they would be very competitive and with 0 debt even more so. It's pretty risky though: 1 - the EU and others could erect trade barriers after such a default 2 - the rest of the EU could collapse with them, which means they won't be buying much stuff either

Uchikoma 15y ago

If Greece defaults, it will go down the drain badly. They will not get out of this as good as Argentina did. With no significant exports (that the EU doesn't pay for with subsidies) and living from subsidies and dept over the years, there is no chance for progress. With real riots in Greece, Spain and Portugal will think twice. This will get Spain and Portugal get their job done, not giving Greece more money. That said, the best would be to inject more money beside the debt into Greece to start some recovery. Given, Greece did cheat on the EU in the past concerning EU money, nevertheless this should get out Greece faster.