74.1% yield on 2-year Greek government bonds

http://www.bloomberg.com/apps/quote?ticker=GGGB2YR:IND

by friism • 15 years ago

55 65 15 years ago

Can you explain this in lehmans?

latch• 15 years ago

If 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.

chocoheadfred3• 15 years ago

Thanks. If I bought these bonds and they actually paid back, if get a 75% return? So, how is risk calculated...quantitatively or more gut?

adaml_623• 15 years ago

Is that a subtle play on words?

goodside2• 15 years ago

The 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.)

goatforce52• 15 years 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."

tribeofone• 15 years ago

Sure. 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...

Symmetry4• 15 years ago

It'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.

tybris3• 15 years ago

The 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• 15 years ago

I'd say it's about half a Lehman, give or take a Countrywide.

obiterdictum• 15 years ago

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.

lubos• 15 years 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• 15 years 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....)

chernevik2• 15 years 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.

VladRussian• 15 years 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.

guelo2• 15 years ago

This 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.

Kliment3• 15 years ago

Sorry to be nitpicky, but Italy is the first I in PIIGS, the second being Ireland.

guelo2• 15 years ago

oops, you're right, though I should have mentioned that even France is being affected now, the 5th largest economy.

hugh32• 15 years ago

Sorry to be even more nitpicky, but... in what sense is it not the other way around?

yaix• 15 years ago

Italy does not have a deficit problem, it has a political problem. And everybody knows who it is.

smackfu• 15 years ago

I'm shocked that Italy is the eighth largest economy. I kind of thought they were one of those where the major industry was tourism.

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nomin...

Vivtek• 15 years ago

Italy has a whole lot of little manufacturing companies. And some big ones, too, but really an incredibly resilient manufacturing ecology.

riffraff• 15 years ago

it is in fact also in the top ten exporters http://en.wikipedia.org/wiki/List_of_countries_by_exports

arethuza• 15 years ago

An awful lot of very desirable things get manufactured in Italy and they have an economy that is roughly the same size as California's ($2,112,780M for Italy, $1,911,822M for California):

http://en.wikipedia.org/wiki/Comparison_between_U.S._states_...

They also are number 5 in terms of international tourism (France being top):

http://en.wikipedia.org/wiki/World_Tourism_rankings

pyramid• 15 years ago

An interesting list I found the other day:

Automotive: Ferrari, Alfa Romeo, Maserati, Lamborghini, Lancia, Fiat

Agricultural and construction equipment: Iveco, New Holland, Case [CHN is the 2d largest agricultural manufacturer in the world and the third construction]

Motorbikes: Piaggio (Aprilia, Moto Guzzi, Vespa), Ducati, Cagiva [Piaggio is the world's 4th largest motorcycle manufacturer and the largest European one]

Bicycles: Bianchi is the world's most prestigious brand of racing bikes.

Technogym: official supplier of the Olympics

Shipbuilding: Fincantieri is one of the world's largest ship manufacturers having built cruises for Carnival, Cunar, Disney, Holland America, etc. Ferretti luxury motoryatchs. Filippi Boats, the world's premier racing shells

Manufacturing: Pirelli (tires), Indesit is Europe's second largest manufacturer of home appliances Candy Group owns Hoover Europe Chicco, toys Finmeccanica (Helicopters (Augusta), Missiles DeLonghi: appliances, owns Kenwood

Technology: STMicroelectronics Europe's largest semiconductor company and the world's fifth (after Intel, Samsung, Texas Instruments and Toshiba) Thales Alenia Space, Europe's largest satellite manufacturer, is an Italian/French consortium NHIndustries (Helicopters) Eurofighter, Alenia

Fashion: Armani, Prada, Gucci, Fendi, Bulgari, Salvatore Ferragano, Ermenegildo Zegna, Versace, Valentino, Borsalino, Dolce & Gabbanna, Diesel, Bennetton, Mandarina Duck

Eyewear: Luxottica is the largest eyewear company in the world. It owns Ray-Ban, Sunglass Hut, LensCrafters, Oakley. It manufactures pretty much every luxury brands in the world.

Sports: Lotto, Kappa, Diadora, Geox, Fila, Nordica, MOMO

Music Fazionli Pianos are widely regarded as the finest in the world

Food: Parmalat is the world's largest dairy products manufacturer Autogrill is the world largest catering company (airports, train stations) Ferrero (Nutella, Ferrero Rocher, Kinder and tic tac among others) Barilla: World's largest manufacturer of pasta

Wine: Italy produces the largest amount of wine in the world

Beverages: Martini, Campari, Cinzano, Maraschino

Arms: Beretta, Benelli, Perazzi (precision guns frequently used in olympic competitions)

Petroleum: Eni (including Agip) Europe's Third largest oil refiner. Market value of 100 Billion Euros Enel is the third largest electricity provider in the world

Finance: Unicredit - Capitalia is Europe's second largest bank Intesa Sanpaolo is Europe's third largest bank Assicurazioni Generali is the world's fifth biggest insurance company

Media: Mediaset, Panini

Italy is the second largest producer of movies in the western world after the USA.

Federico Fellini, Vittorio De Sica, Martin Scorcese, Sergio Leone, Roberto Rosellini, Bernardo Bertolucci, Roberto Benigni, Pier Paolo Pasolini, Dario Argento, frequent collaborations with Italian Americans like Brian De Palma, Francis Ford Coppola, Nicolas Cage, Leonardo Di Caprio, Al Pacino, etc.

laaph• 15 years ago

If 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• 15 years ago

You'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• 15 years ago

Does 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.

hugh32• 15 years ago

Does 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.

zalthor• 15 years 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)

Symmetry4• 15 years 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.

mcnees2872• 15 years 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.

mcnees2872• 15 years ago

Government debt is almost always unsecured.

johnyzee• 15 years 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.

stonemetal• 15 years 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.

vitaminj2• 15 years 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.

teyc• 15 years ago

Why 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

_delirium• 15 years ago

There 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.

tybris3• 15 years ago

It means they're bankrupt.

coob• 15 years ago

Greek banks own a lot of Greek government debt.

How has there not been a run on Greek banks yet?

74.1% yield on 2-year Greek government bonds

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