4 ms·

Now, 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,

by zalthor 15y ago

Now, 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 ago
For 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 ago
  Governments 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 ago
The 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.
- mcnees287 15y ago
  Just because you default doesn't mean no one will lend to you in the future. Greek has defaulted many times in the recent past. They will have to pay a much higher rate in the future. Making default expensive.
mcnees287 15y ago
Government debt is almost always unsecured.
- DeanCollinsLCC 15y ago
  sure but how often is it really defaulted on except through currency devaluation which isn't really an option here.
stonemetal 15y ago
When you take out a loan say for a car, you put the car as collateral. This is called a secured loan. When you charge something to your credit card you don't put up any collateral. This is called an unsecured loan. Government bonds are of the unsecured type so you don't get anything if they don't pay.
vitaminj 15y ago
Default has a pretty loose definition, but what will most likely happen is some kind of debt restructuring (which people will interpret as a default), e.g. extending the maturity on bonds, writing off some parts of the debt, paying out a lower coupon rate, etc. Basically, german and french banks (who hold a big chunk of the debt) will lose a pile of cash.

by zalthor 15y ago

johnyzee 15y ago

For 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 ago
Governments 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 ago

The 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.

mcnees287 15y ago
Just because you default doesn't mean no one will lend to you in the future. Greek has defaulted many times in the recent past. They will have to pay a much higher rate in the future. Making default expensive.

mcnees287 15y ago

Government debt is almost always unsecured.

DeanCollinsLCC 15y ago
sure but how often is it really defaulted on except through currency devaluation which isn't really an option here.

stonemetal 15y ago

When you take out a loan say for a car, you put the car as collateral. This is called a secured loan. When you charge something to your credit card you don't put up any collateral. This is called an unsecured loan. Government bonds are of the unsecured type so you don't get anything if they don't pay.

vitaminj 15y ago

Default has a pretty loose definition, but what will most likely happen is some kind of debt restructuring (which people will interpret as a default), e.g. extending the maturity on bonds, writing off some parts of the debt, paying out a lower coupon rate, etc. Basically, german and french banks (who hold a big chunk of the debt) will lose a pile of cash.