4 ms·

Not 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 se

by lubos 15y ago

Not 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 ago
Indeed 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 ago
  But 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
You're probably right, they'll make some principal payment, perhaps even par -- but in what currency? If it's drachmas, you're getting a claim on the various things Greece exports. Hence views on the value of greek bonds are increasingly driven by views on the prospects for the olive oil market. After three millenia of maturation, this is now considered a commodity market with little potential for pricing power . . . P.S. The Germans may, at some point, prefer to bail out their banks, as there they have some capacity to draw a line and call a halt. The _real_ question is the implications of a Greek default / euro withdrawal on European political integration. The Germans care a great deal more about that, and are probably prepared to pay a very high price for it. The question comes down to, how much of others' welfare states must they underwrite, and how much will they underwrite.
- danssig 15y ago
  >P.S. The Germans may, at some point, prefer to bail out their banks, as there they have some capacity to draw a line and call a halt. I think Germany is loving this crisis. The number it's doing on the Euro has been incredible for their export economy. I suspect they'll do whatever they need to to keep this going as long as possible.
  - achompas 15y ago
    That's about the only benefit they're seeing, and it doesn't compensate for the risk they'll take on when (ultimately) asked to bail out a number of countries.
  - davvid 15y ago
    German politicians or the German people? Last I heard the latter have not been very happy about having to bail out the entire euro sector.
    - danssig 15y ago
      Big German businesses. I suspect that pulls in many of the politicians in as well. Of course most of the people hate it, it doesn't help them at all and their tax money is financing it.
- vitaminj 15y ago
  There is no legal basis for kicking Greece out of the euro. None of the relevant treaties have any provision for member states kicking another state out of the monetary union or a member state leaving of their own accord. I think there is a provision for a state to leave the EU, but only of its own accord and not by force, and they'd have to leave the EU not just the monetary union. So if its going to be legal, there'd have to be some amendments made to the treaties. Of course, Greece could just turn its back on the treaties, ditch the euro, re-instate the drachma, convert all debt obligations to drachmas and go on its merry way devaluing the drachma against the euro. But they would no doubt face retaliation from an angry EU and will likely get hit with stiff trade barriers on Greece exports as punishment (in which case devaluing the drachma would have limited effect). I think the more likely outcome will be some kind of debt restructuring, a situation where the foreign bondholders (who own almost 60% of the debt) will have to finally face up to their losses.
VladRussian 15y ago
>Also 98% chance seems pretty high and what is the alternative? To pay back with 74% of interest? In real money (ie. euro/dollar)? The only possible non-default way is several times inflation of Greek currency.
- andrewla 15y ago
  None of this changes how much Greece has to pay (unless they issue new debt). The actual Euro yield is based on the face value of the bond, which doesn't change. This is just the market saying that the bonds are worth considerably less than their face value.
- Symmetry 15y ago
  Unfortunately the Greek currency is the Euro, and the Greeks can't print more of it. A moderate amount of inflation at the start of this whole mess could possibly have headed off the looming disaster, but it would certainly take way more than the Germans could ever tolerate now.
  - mohawk 15y ago
    Printing money to service debt will most likely drive inflation higher, in turn driving up interest rates investors will demand from government bonds. This escape route from a towering debt burden was tried by German post-WW1 governments, and lets just say it didn't go very well. It's the reason the Bundesbank is the way it is now.
    - onemoreact 15y ago
      Clearly the interest rate paid relates to past inflation rates, but if the goal is to pay off the national debt not just borrow more a little inflation can help things along. Say inflation is 2% interest rate is 2% over inflation (or 4%) and the bond is for 10 years. 1.04^10/1.02^10 = 1.2143. Now compare that to 3% and major assumption you still need to pay out 2% over inflation well you get 1.212 which is a lower cost. At the same time your debt servicing costs drop. Now it's true that you may need to pay a fraction more than 2% in interest but for small positive increases in inflation it can reduce debt servicing costs significantly. For this to really work well your new debt needs to be well below your debt servicing costs AND you need to hold mostly long term bonds is rarely the case for country’s with debt issues. Unfortunately, few nations are trying to pay off their national debts and are more focused on maximizing their ability to borrow which is another story.

by lubos 15y ago

hga 15y ago

Indeed 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 ago
But 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

You're probably right, they'll make some principal payment, perhaps even par -- but in what currency? If it's drachmas, you're getting a claim on the various things Greece exports. Hence views on the value of greek bonds are increasingly driven by views on the prospects for the olive oil market. After three millenia of maturation, this is now considered a commodity market with little potential for pricing power . . . P.S. The Germans may, at some point, prefer to bail out their banks, as there they have some capacity to draw a line and call a halt. The _real_ question is the implications of a Greek default / euro withdrawal on European political integration. The Germans care a great deal more about that, and are probably prepared to pay a very high price for it. The question comes down to, how much of others' welfare states must they underwrite, and how much will they underwrite.

danssig 15y ago
>P.S. The Germans may, at some point, prefer to bail out their banks, as there they have some capacity to draw a line and call a halt. I think Germany is loving this crisis. The number it's doing on the Euro has been incredible for their export economy. I suspect they'll do whatever they need to to keep this going as long as possible.
- achompas 15y ago
  That's about the only benefit they're seeing, and it doesn't compensate for the risk they'll take on when (ultimately) asked to bail out a number of countries.
- davvid 15y ago
  German politicians or the German people? Last I heard the latter have not been very happy about having to bail out the entire euro sector.
  - danssig 15y ago
    Big German businesses. I suspect that pulls in many of the politicians in as well. Of course most of the people hate it, it doesn't help them at all and their tax money is financing it.
vitaminj 15y ago
There is no legal basis for kicking Greece out of the euro. None of the relevant treaties have any provision for member states kicking another state out of the monetary union or a member state leaving of their own accord. I think there is a provision for a state to leave the EU, but only of its own accord and not by force, and they'd have to leave the EU not just the monetary union. So if its going to be legal, there'd have to be some amendments made to the treaties. Of course, Greece could just turn its back on the treaties, ditch the euro, re-instate the drachma, convert all debt obligations to drachmas and go on its merry way devaluing the drachma against the euro. But they would no doubt face retaliation from an angry EU and will likely get hit with stiff trade barriers on Greece exports as punishment (in which case devaluing the drachma would have limited effect). I think the more likely outcome will be some kind of debt restructuring, a situation where the foreign bondholders (who own almost 60% of the debt) will have to finally face up to their losses.

VladRussian 15y ago

>Also 98% chance seems pretty high and what is the alternative? To pay back with 74% of interest? In real money (ie. euro/dollar)? The only possible non-default way is several times inflation of Greek currency.

andrewla 15y ago
None of this changes how much Greece has to pay (unless they issue new debt). The actual Euro yield is based on the face value of the bond, which doesn't change. This is just the market saying that the bonds are worth considerably less than their face value.
Symmetry 15y ago
Unfortunately the Greek currency is the Euro, and the Greeks can't print more of it. A moderate amount of inflation at the start of this whole mess could possibly have headed off the looming disaster, but it would certainly take way more than the Germans could ever tolerate now.
- mohawk 15y ago
  Printing money to service debt will most likely drive inflation higher, in turn driving up interest rates investors will demand from government bonds. This escape route from a towering debt burden was tried by German post-WW1 governments, and lets just say it didn't go very well. It's the reason the Bundesbank is the way it is now.
  - onemoreact 15y ago
    Clearly the interest rate paid relates to past inflation rates, but if the goal is to pay off the national debt not just borrow more a little inflation can help things along. Say inflation is 2% interest rate is 2% over inflation (or 4%) and the bond is for 10 years. 1.04^10/1.02^10 = 1.2143. Now compare that to 3% and major assumption you still need to pay out 2% over inflation well you get 1.212 which is a lower cost. At the same time your debt servicing costs drop. Now it's true that you may need to pay a fraction more than 2% in interest but for small positive increases in inflation it can reduce debt servicing costs significantly. For this to really work well your new debt needs to be well below your debt servicing costs AND you need to hold mostly long term bonds is rarely the case for country’s with debt issues. Unfortunately, few nations are trying to pay off their national debts and are more focused on maximizing their ability to borrow which is another story.