

74.1% yield on 2-year Greek government bonds - friism
http://www.bloomberg.com/apps/quote?ticker=GGGB2YR:IND

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obiterdictum
[http://www.bloomberg.com/news/2011-09-12/greece-s-risk-of-
de...](http://www.bloomberg.com/news/2011-09-12/greece-s-risk-of-default-
increases-to-98-as-european-debt-crisis-deepens.html)

98% chance of default makes them essentially expensive lottery tickets at this
point.

~~~
lubos
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.

~~~
chernevik
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
>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.

~~~
davvid
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
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.

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chocoheadfred
Can you explain this in lehmans?

~~~
latch
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.

~~~
chocoheadfred
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?

~~~
wladimir
Yes. 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
To 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
Regardless 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
Ah yes, you're correct. So my yield is way off. Thanks for the correction.

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zalthor
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
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.

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laaph
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.)

~~~
anamax
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.

~~~
hugh3
_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.

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guelo
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.

~~~
smackfu
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...](http://en.wikipedia.org/wiki/List_of_countries_by_GDP_\(nominal\))

~~~
arethuza
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_...](http://en.wikipedia.org/wiki/Comparison_between_U.S._states_and_countries_by_GDP_%28nominal%29)

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

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

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teyc
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
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.

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coob
Greek banks own a lot of Greek government debt.

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

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tybris
It means they're bankrupt.

