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The ratings agencies have said that arm-twisting bondholders to accept new bonds with less favourable conditions amounts to a default. I promise to pay you $10

The ratings agencies have said that arm-twisting bondholders to accept new bonds with less favourable conditions amounts to a default. I promise to pay you $100 tomorrow. I then tell you you'll get your money in 30 years and at a much lower interest rate. That's breaking the original promise, even though I haven't actually 'not paid you back'.

ma2rten 15y ago
You don't have to except the deal, the only reason to do so is fear that they bail out on you later. So I'd say that if it's binary, this is not a default.
_delirium 15y ago
I don't think it's a default in that example until tomorrow comes and I fail to hand over the $100. Until then we're just negotiating and speculating about whether I will or won't hand it over.
- benmmurphy 15y ago
  i think this is a situation where words are kind of hiding what really matters. what people care about when it comes to 'default' is how this effects the debtors ability to pay in the future and renegotiating debt is a sign that someone may be less able to pay in the future compared to someone that continues to make payments normally.
- mdda 15y ago
  Then people with an interest in Greece defaulting will buy a small amount of all the short-term debt they can find, and play hardball as it comes due.
Someone 15y ago
The question is whether this is arm-wrestling. A way to describe what is happens is that the EU says "we know some people are worried about the money Greece owns them. For them, we offer insurance. We have several pricing schemes for that assurance:..." Phrasing it that way would IMO put some spin on it, but it would not be a bland lie, either. I think they stroke a good balance here. It is not arm-wrestling, but they likely will reach the intended goals (decrease immediate pressure on Greece, and show the world that the EU will help countries in trouble)
joe_the_user 15y ago
Again, you can call X "effective default" or say X "amounts to default" all you want and I wouldn't argue with your definition. But since the OP called default an absolute binary, then if we want that, we have to wait till we have literal default. IE, what I tell you doesn't matter, we have to wait till it is tomorrow and I haven't paid. The point is that in an "effective default", there's no violation of any explicit contract however much the loaning parties may have lost confidence. IE, if Greece was home-owner renegotiating its mortgage, there is no point where the bank can go to court and demand the house (though against sovereign nation, banks, of course, have no such recourse but its considered important, I believe).
- richardw 15y ago
  Sure. I was saying that the important point is that the _ratings agencies_ call it a default. Your and my (and the OP's) definition isn't important. If they think it's a default then for a percentage of the world (who need ratings agencies' support), it's binary-on. Another agency, the ISDA, says it's _not_ a default for the purposes of a CDS trigger. That, for another percentage of the population, is binary-off. http://blogs.reuters.com/felix-salmon/2011/07/22/the-cds-market-and-greeces-default/ http://blogs.reuters.com/felix-salmon/2011/07/22/the-cds-mar...

ma2rten 15y ago

You don't have to except the deal, the only reason to do so is fear that they bail out on you later. So I'd say that if it's binary, this is not a default.

_delirium 15y ago

I don't think it's a default in that example until tomorrow comes and I fail to hand over the $100. Until then we're just negotiating and speculating about whether I will or won't hand it over.

benmmurphy 15y ago
i think this is a situation where words are kind of hiding what really matters. what people care about when it comes to 'default' is how this effects the debtors ability to pay in the future and renegotiating debt is a sign that someone may be less able to pay in the future compared to someone that continues to make payments normally.
mdda 15y ago
Then people with an interest in Greece defaulting will buy a small amount of all the short-term debt they can find, and play hardball as it comes due.

Someone 15y ago

The question is whether this is arm-wrestling. A way to describe what is happens is that the EU says "we know some people are worried about the money Greece owns them. For them, we offer insurance. We have several pricing schemes for that assurance:..." Phrasing it that way would IMO put some spin on it, but it would not be a bland lie, either. I think they stroke a good balance here. It is not arm-wrestling, but they likely will reach the intended goals (decrease immediate pressure on Greece, and show the world that the EU will help countries in trouble)

joe_the_user 15y ago

Again, you can call X "effective default" or say X "amounts to default" all you want and I wouldn't argue with your definition. But since the OP called default an absolute binary, then if we want that, we have to wait till we have literal default. IE, what I tell you doesn't matter, we have to wait till it is tomorrow and I haven't paid. The point is that in an "effective default", there's no violation of any explicit contract however much the loaning parties may have lost confidence. IE, if Greece was home-owner renegotiating its mortgage, there is no point where the bank can go to court and demand the house (though against sovereign nation, banks, of course, have no such recourse but its considered important, I believe).

richardw 15y ago
Sure. I was saying that the important point is that the _ratings agencies_ call it a default. Your and my (and the OP's) definition isn't important. If they think it's a default then for a percentage of the world (who need ratings agencies' support), it's binary-on. Another agency, the ISDA, says it's _not_ a default for the purposes of a CDS trigger. That, for another percentage of the population, is binary-off. http://blogs.reuters.com/felix-salmon/2011/07/22/the-cds-market-and-greeces-default/ http://blogs.reuters.com/felix-salmon/2011/07/22/the-cds-mar...