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74.1% yield on 2-year Greek government bonds
- chocoheadfred 15y agoCan you explain this in lehmans?
- latch 15y agoIf I asked you for $100 and your mother asked you for $100, you'd charge me more interest, because I'm [hopefully] a higher risk [from your point of view]. The interest paid on bonds is directly related to the risk of holding the bond (or, the perceived risk). A high interest rate (which the government pays) is the only way the government can get people to buy its bonds, because it's considered a high risk. It pretty much means that, people aren't expecting Greece to be able to pay back its debt in 2 years. Which is really bad, normally, short term bonds have lower rates (because the risk is lower)...but now, even at 2-years, people see huge risk. People want 75% interest on, what is essentially, a 2 year loan. Compare that to other parts of the world where you're taking 3% on 20 years....20 years is a long time, anything can happen, but even over such a huge difference in time scale, greece is a much, much, higher risk.
- chocoheadfred 15y agoThanks. If I bought these bonds and they actually paid back, if get a 75% return? So, how is risk calculated...quantitatively or more gut?
- wladimir 15y agoYes. It's kind of a "double-or-nothing" casino game. The yield is determined by the free market, it's the amount that Greece has to (promise to) pay for anyone to take them. It's not determined by a formula afaik, just based on current events and the state of the country's finances. I don't think you can invest (or rather, speculate, this is too crazy to call investing) in these as normal retail investor though.
- illumin8 15y agoTo be clear, the yield is determined by the free market as the price they pay for the bond. If the bond was originally priced at $100, with a 1% coupon payment (the amount the government or bond issuer will pay you in interest), if the resale value goes down to $50 in the open market, then the yield has doubled to 2%, since a new owner of the bond only had to pay $50 to get the same $1 coupon payment while holding the bond.
- fr0sty 15y agoRegardless of whether the bond has a coupon payment or not the face value of the bond is due at maturity. In your example the $1 coupon is still paid but in two years you also get $100 back on your $50 purchase (netting 20+%apy). Of course if the government defaults on your bond you get maybe on $1 coupon and end with a net loss of $49.
- illumin8 15y agoAh yes, you're correct. So my yield is way off. Thanks for the correction.
- goodside 15y agoRemember that rates are always given as annual rates. If you buy $100 in two-year bonds, in two years you get about $303 back, or ($100 * 1.74^2).
- adaml_623 15y agoIs that a subtle play on words?
- goodside 15y agoThe word is "layman's". Lehman Brothers is the investment bank that collapsed in 2008. Cute typo. The simplest translation, though: The market believes that if you were to loan money to Greece for two years, there's only about a 33% chance that you'll get your money back. (That's 1.74^(-2) assuming risk-neutrality and a risk-free rate of 0%, which is depressing but sure makes calculations easier. In reality, the math is much more complicated, as nobody is actually neutral to asset risk, and you have to consider pseudo-defaulting via inflation, and the fact that bonds aren't entirely worthless after a default, etc.)
- goatforce5 15y ago> The word is "layman's". Lehman Brothers is the investment bank that collapsed in 2008. Cute typo. Maybe a Lehman has become a measure of the scale of financial failure. "Greek defaulting would be 12.72 Lehmans."
- z92 15y agoNow I am convinced the questioner probably was asking for this figure too. How many Lehmans equals Greece defaulting?
- tybris 15y agoActually, 0.39 Lehmans. Greek debt is around $240 billion and Lehman assets were around $613 billion. Of course, that number does not even consider that countries only partially and temporarily default, instead of fully and permanently like limited corporations, and that everyone who owns Greek debt has had a generous advance warning. This is really a comparatively minor crisis.
- chocoheadfred 15y agoWe have it then. A Lehman is a term of measuring crappy financial situations and is worth $613B. So, a correct use would be like "Don't worry, our national debt is only 25 Lehmans."
- goatforce5 15y ago
- tribeofone 15y agoSure. This is a HUGE opportunity to make a buck! BUY, BUY BUY!! No cash, borrow and BUY! Leverage baby leverage! Were going to make a killing on this! Oh... sorry, I see you actually meant layman's...
- Symmetry 15y agoIt'll be pretty bad because regulators have dealt with failing banks before but the EU has never had to deal with a member state defaulting and does not really have any institutions to deal with it. I'd says this disaster will probably end up being about 10 Lehmans in magnitude, though the fall of the Lehman brothers was only part of the financial crisis.
- tybris 15y agoThe collapse of Lehman brothers was an event that threatened the stability of the global financial system. The default of Greece is a minor nuisance that is mainly relevant because of fear that Italy and Spain might be next.
- jasonkolb 15y agoI'd say it's about half a Lehman, give or take a Countrywide.
- deleted 15y ago[deleted]
- obiterdictum 15y agohttp://www.bloomberg.com/news/2011-09-12/greece-s-risk-of-default-increases-to-98-as-european-debt-crisis-deepens.html http://www.bloomberg.com/news/2011-09-12/greece-s-risk-of-de... 98% chance of default makes them essentially expensive lottery tickets at this point.
- deleted 15y ago[deleted]
- lubos 15y agoNot really, if Greece defaults, bonds will still hold certain value (like half of the original price or so). So not really a lottery ticket. Also 98% chance seems pretty high especially when Germany and France are going to do everything to avoid this because their banks are heavily invested in Greek bonds.
- hga 15y agoIndeed to both ... but Germany and France can't bail out all the PIIGS. Spain is probably outright impossible and Italy is out of the question. And that's ignoring the willingness of the citizens of the former to indefinitely fund the profligate ways of their southern neighbors; I'm not sure how responsive the French government is or has to be to its electorate but I gather the German system works well enough. (Plus don't forget that German GDP or what it export growth just flattened....)
- jtolle 15y agoBut Spain and Italy are in a much different situation than Greece or the other smaller "peripheral" Euro economies. Basically, Greece needs a bailout or must leave the Euro. Italy needs non-insane monetary policy: http://krugman.blogs.nytimes.com/2011/08/07/a-self-fulfilling-euro-crisis-wonkish/ http://krugman.blogs.nytimes.com/2011/08/07/a-self-fulfillin... http://krugman.blogs.nytimes.com/2011/09/11/the-spanish-prisoner/ http://krugman.blogs.nytimes.com/2011/09/11/the-spanish-pris...
- chernevik 15y ago
- ristretto 15y agoThe government of greece does not issue bonds at this time. This is probably mostly due to speculation. It's unlikely that the whole of europe went through so much pain just to let greece default now.
- guelo 15y agoThis could get ugly, Greece is a gonner and the crises is now extending beyond the so called PIIGS to Italy, the eight largest economy in the world. Another financial crisis worse then 08's but without a central political authority with the power to shore things up. The shock will be felt worldwide.
- Kliment 15y agoSorry to be nitpicky, but Italy is the first I in PIIGS, the second being Ireland.
- guelo 15y agooops, you're right, though I should have mentioned that even France is being affected now, the 5th largest economy.
- kanamekun 15y agoThere was a great quote about France's economic reliability in Michael Lewis' recent Vanity Fair piece: << The idea he and his fellow dissident German economists have cooked up is to split the European Union in two, for financial purposes. One euro, a kind of second-string currency, would be issued for, and used by, the deadbeat countries—Greece, Portugal, Spain, Italy, and so on. The first-string euro would be used by “the homogenous countries, the ones you can rely on.” He lists these reliable countries: Germany, Austria, Belgium, the Netherlands, Finland, and (he hesitates for a second over this) France. “Are you sure the French belong?” “We discussed this,” he says seriously. They decided that for social reasons you couldn’t really exclude the French. It was just too awkward. >> http://www.vanityfair.com/business/features/2011/09/europe-201109 http://www.vanityfair.com/business/features/2011/09/europe-2...
- hugh3 15y agoSorry to be even more nitpicky, but... in what sense is it not the other way around?
- 15y ago
- laaph 15y agoIf I wanted to risk a few hundred dollars in propping up the Greek government, is there an easy way to this? Or is there a minimum investment way larger than I'd like to commit and/or only open to licensed brokers only? (Apologies for stupid newbie investor questions... I read about this stuff in the news, but I have no idea how it actually works.)
- AHorihuela 15y agoYou'd need to get a brokerage account that allows you to trade sovereign bonds. (I think TD Ameritrade might do). And from there it should be a straight shot. The only problem is that if you invest only a few hundred bucks, trading commissions (~$20 to buy and sell) eat up a big portion of your (potential) returns. For example, if you invest $200 and come out of your trade even (selling bonds back to the market for $200), you still pay $20 in trading commissions, so you'd be already down 10% on your trade. In other words, you'd need to be up 10% on your trade (which is very nice) in order to just compensate for commissions.
- anamax 15y agoDoes buying existing bonds help prop up the Greek govt? Remember - they don't get any money from that transaction. If you want to help prop up the Greek govt, you probably have to give it money, that is, buy new bonds from it. It's probably not offering to pay 74% on such loans. And, given the yield of current bonds, it's probably not even bothering to try to sell bonds.
- hugh3 15y agoDoes buying existing bonds help prop up the Greek govt? Remember - they don't get any money from that transaction Well in some sense... if you create demand for the existing bonds then you create confidence in them, and hence drive down yields on the next round of bonds that get issued.
- deleted 15y ago[deleted]
- zalthor 15y agoNow, I'm not very knowledgeable about the world of finance, but what I'm curious about is, what happens if Greece defaults? Like if you default on a bank loan, the bank takes your house. On those lines, if (when) Greece defaults and I have some government bonds, I would get like a government office desk or something? (or some physical object that is of equivalent value to the amount I have bonds for)
- johnyzee 15y agoFor some reason this is hardly ever discussed. But I guess we can look to the situation in Argentina which defaulted in 2002. Oddly, there doesn't seem to have been long-term adverse consequences, most investors took a haircut or lost their money. The country had a deep depression for a couple of years but have been doing pretty well recently. I hope someone with more information can chime in on this.
- oelewapperke 15y agoGovernments are sovereign entities. They don't have to abide by laws at all. So they can just declare your bonds worthless (actually all of the branches can : the parliament, justice system and the executive can declare your bonds worthless) The only consequence this has is the long-term viability of those bonds. The problem is that Greece needs fresh borrowed money just to make the interest payments on it's currently borrowed capital.
- Symmetry 15y agoThe Greek government doesn't currently have have enough tax income to pay for all the spending it does. If it defaulted nobody would be willing to lend it money so it would have to reduce spending even more and the politicians would get lynched. However, as a sovereign state there would normally be no other downside to defaulting except that people won't lend you money in the future. However, I believe that one of the requirements for membership in the EU is that you promise that you won't default on your debts. How this will play out in practice, I have no idea.
- 15y ago
- teyc 15y agoWhy is the one year yield even higher? I thought two year is higher risk? Opportunity for arbitrage here? http://www.bloomberg.com/apps/quote?ticker=GGGB1YR:IND http://www.bloomberg.com/apps/quote?ticker=GGGB1YR:IND
- _delirium 15y agoThere are certain risk profiles where it'd make sense. For example, if you think that a default is most likely to happen within the next 6 months or not at all, then the 2-year bond has about the same default risk as the 1-year bond, but locks in the high interest rate for longer, so has more potential upside.
- tybris 15y agoIt means they're bankrupt.
- coob 15y agoGreek banks own a lot of Greek government debt. How has there not been a run on Greek banks yet?