4 ms·

Basically, it renogatiates the terms of outstanding debts to a new interest rate, and longer terms. See also: http://en.wikipedia.org/wiki/Sovereign_default ht

by jvdh 15y ago

Basically, it renogatiates the terms of outstanding debts to a new interest rate, and longer terms. See also: http://en.wikipedia.org/wiki/Sovereign_default http://en.wikipedia.org/wiki/Sovereign_default

bad_user 15y ago
So that doesn't sound so bad. Why are people freaking out on the US, Greece and Spain? Sorry, I'm totally unfamiliar with these things.
- tobylane 15y ago
  US total debt is apparently nearly 55 trillion dollars [1] which is a massive amount to suddenly be written off by banks and governments all over the world. One of many many effects is that your cost of living will rise quickly. http://www.usdebtclock.org/ http://www.usdebtclock.org/
  - nhaehnle 15y ago
    The US total debt is actually more like 14 trillion dollars. People come up with this 55 trillion dollar numbers by adding in future social security-type outlays, which are always paid out of the current budget. These types of numbers are a form of FUD which is spread by ideologues. Think about it this way. Suppose you rent an apartment for 1500$ per month, and expect to live in it for the next 10 years. If you follow the logic of the people who claim a 55 trillion debt, then you would claim that you now have a debt of 180,000$. We all know that that claim is ridiculous, but unfortunately, the same flawed logic is slightly harder to detect and unravel when it comes to something as complex as the entire economy.
    - Someone 15y ago
      There is a difference in commitment. You can easily get out of that apartment, but not out of those future social security-type outlays. That is why accountants call 'future payable' stuff a debt. That "out of their current budget" is irrelevant. Most people who buy a house on mortgage pay of their debt out of their current budget, too. A mortgage still is a debt, though (ideally (more than) balanced by the worth of the property you bought for the mortgage)
- thaumaturgy 15y ago
  Because a default -- even a "technical" default in the form of an extension or renegotiation -- indicates a serious problem in a country's finances, which can affect its credit rating and, in turn, its ability to continue borrowing as well as the value of its currency. The U.S. has defaulted before, in 1933, but this would still be considered a very significant event in global economics, and economists really don't need another reason to get nervous right now. There is, by the way, an interesting elephant in the room that I've yet to hear mentioned anywhere: once we've gotten to the point that people start discussing the possibility of simultaneous defaults of several major countries, nobody's really sure what will happen next, and, nobody's really sure how to get out of the hole, since we've never been in this deep before.
  - gnosis 15y ago
    "The U.S. has defaulted before, in 1933" So it's defaulted.. and look where it is now. If Greece looks to the US as a model it should default, and the sooner the better. "Because a default ... can affect its credit rating and, in turn, its ability to continue borrowing..." Borrowing is what got Greece in trouble in the first place. Perhaps putting and end to borrowing from other countries would put it on a sounder financial footing. At least it would never again get in to the situation where many future generations would be forced to repay the debts of their ancestors.
- jvdh 15y ago
  In itself the renegotiation is not that bad, and often works out. What makes it worse is that the government openly admits that it has a very big problem in staying solvent. This makes it harder for them to get new loans in the future. Also other financial institutions will lose trust in that country, causing money to flow out and devaluation of the currency. This in turn makes it harder for that country to do business with others. In the end, hard measures will have to be taken so that trust can be restored.
- chalst 15y ago
  Bonds are not like equities. Bonds pay out a fixed amount of interest, and so there is no chance of hitting the lottery; with equities, the company stock can skyrocket. Hence bonds are a risk-averse investment, and so bond holders are very jumpy about default. The Greek bonds, IIRC, before the CDS rates (credit default swap: basically a bet on the chance of a bond going into default) started creeping up, were issued at around 3% coupon. This value is consistent only with a very low perceived risk of serious default by the buyers of bonds. At the moment, CDS markets are showing a near probability of Greece going into default: the bond rates are artificially low only because of massive government and IMF intervention in the markets. Note also that even after the drastic austerity measures, Greece is still running a budget deficit, so if it defaults, it cannot finance its expenses even in the short term. Greece is small fry, but it is seen as a test case for bigger countries: probably Spain, possibly Italy. Actually, the situation is worse in Portugal than Greece, since Portugal is also insolvent and has shown nothing like the political resolve that Greece has. But Portugal is tiny. Many of the banks in wealthier European countries are heavily exposed to PIGS (Portugal-Spain-Ireland-Greece) debt, so expect serious PIGS defaults to be followed by rich country bank crises. German banks, in particular, are badly exposed to Spanish government debt. The "stress tests" of European banks carried out in 2010 explicitly did not test for sovereign default, presumably to avoid frightening bond holders.
borism 15y ago
This is called restructuring, not a default.
- pwaring 15y ago
  A restructuring can be classed as a default by the rating agencies, and for the purposes of paying out on credit default swaps.
- chalst 15y ago
  Restructuring avoids default only if the creditors agree to it before default. Default is any failure to pay the full amount of the coupon on a bond on time, where the coupon on a bond is the specification of which sums of money are payable when.

by jvdh 15y ago

bad_user 15y ago

So that doesn't sound so bad. Why are people freaking out on the US, Greece and Spain? Sorry, I'm totally unfamiliar with these things.

tobylane 15y ago
US total debt is apparently nearly 55 trillion dollars [1] which is a massive amount to suddenly be written off by banks and governments all over the world. One of many many effects is that your cost of living will rise quickly. http://www.usdebtclock.org/ http://www.usdebtclock.org/
- nhaehnle 15y ago
  The US total debt is actually more like 14 trillion dollars. People come up with this 55 trillion dollar numbers by adding in future social security-type outlays, which are always paid out of the current budget. These types of numbers are a form of FUD which is spread by ideologues. Think about it this way. Suppose you rent an apartment for 1500$ per month, and expect to live in it for the next 10 years. If you follow the logic of the people who claim a 55 trillion debt, then you would claim that you now have a debt of 180,000$. We all know that that claim is ridiculous, but unfortunately, the same flawed logic is slightly harder to detect and unravel when it comes to something as complex as the entire economy.
  - Someone 15y ago
    There is a difference in commitment. You can easily get out of that apartment, but not out of those future social security-type outlays. That is why accountants call 'future payable' stuff a debt. That "out of their current budget" is irrelevant. Most people who buy a house on mortgage pay of their debt out of their current budget, too. A mortgage still is a debt, though (ideally (more than) balanced by the worth of the property you bought for the mortgage)
thaumaturgy 15y ago
Because a default -- even a "technical" default in the form of an extension or renegotiation -- indicates a serious problem in a country's finances, which can affect its credit rating and, in turn, its ability to continue borrowing as well as the value of its currency. The U.S. has defaulted before, in 1933, but this would still be considered a very significant event in global economics, and economists really don't need another reason to get nervous right now. There is, by the way, an interesting elephant in the room that I've yet to hear mentioned anywhere: once we've gotten to the point that people start discussing the possibility of simultaneous defaults of several major countries, nobody's really sure what will happen next, and, nobody's really sure how to get out of the hole, since we've never been in this deep before.
- gnosis 15y ago
  "The U.S. has defaulted before, in 1933" So it's defaulted.. and look where it is now. If Greece looks to the US as a model it should default, and the sooner the better. "Because a default ... can affect its credit rating and, in turn, its ability to continue borrowing..." Borrowing is what got Greece in trouble in the first place. Perhaps putting and end to borrowing from other countries would put it on a sounder financial footing. At least it would never again get in to the situation where many future generations would be forced to repay the debts of their ancestors.
jvdh 15y ago
In itself the renegotiation is not that bad, and often works out. What makes it worse is that the government openly admits that it has a very big problem in staying solvent. This makes it harder for them to get new loans in the future. Also other financial institutions will lose trust in that country, causing money to flow out and devaluation of the currency. This in turn makes it harder for that country to do business with others. In the end, hard measures will have to be taken so that trust can be restored.
chalst 15y ago
Bonds are not like equities. Bonds pay out a fixed amount of interest, and so there is no chance of hitting the lottery; with equities, the company stock can skyrocket. Hence bonds are a risk-averse investment, and so bond holders are very jumpy about default. The Greek bonds, IIRC, before the CDS rates (credit default swap: basically a bet on the chance of a bond going into default) started creeping up, were issued at around 3% coupon. This value is consistent only with a very low perceived risk of serious default by the buyers of bonds. At the moment, CDS markets are showing a near probability of Greece going into default: the bond rates are artificially low only because of massive government and IMF intervention in the markets. Note also that even after the drastic austerity measures, Greece is still running a budget deficit, so if it defaults, it cannot finance its expenses even in the short term. Greece is small fry, but it is seen as a test case for bigger countries: probably Spain, possibly Italy. Actually, the situation is worse in Portugal than Greece, since Portugal is also insolvent and has shown nothing like the political resolve that Greece has. But Portugal is tiny. Many of the banks in wealthier European countries are heavily exposed to PIGS (Portugal-Spain-Ireland-Greece) debt, so expect serious PIGS defaults to be followed by rich country bank crises. German banks, in particular, are badly exposed to Spanish government debt. The "stress tests" of European banks carried out in 2010 explicitly did not test for sovereign default, presumably to avoid frightening bond holders.

borism 15y ago

This is called restructuring, not a default.

pwaring 15y ago
A restructuring can be classed as a default by the rating agencies, and for the purposes of paying out on credit default swaps.
chalst 15y ago
Restructuring avoids default only if the creditors agree to it before default. Default is any failure to pay the full amount of the coupon on a bond on time, where the coupon on a bond is the specification of which sums of money are payable when.