Anyone following the news this morning would have heard of the bondholders ’agreement to accept a reduction in their holdings of Greek sovereign debt of 172 billion euros. In financial jargon, bondholders have been cut, which means they have accepted the fact that they will not regain all their capital when the bond matures.
Figures announced this morning show that the potential debt consolidation is up 74%. What this means is that if you had borrowed (or invested) £ 100, you would receive £ 24. Good deal? I don’t think so!
I can remember a quote once given where it was said that when you owe 1,000 banks is your problem, when you owe 1 million is the problem of the bank. Greek public debt ownership has become the problem of bondholders, not the problem of the Greek government.
With “bondholders,” who do we mean? It seems that the main holders of Greek sovereign debt are the Greek banks and the major banks in France and Germany. They may be the main losers in this, but there are probably many financial institutions, pension funds and unit trusts that have invested part of their capital in these bonds, the effect of which is to see this part of their capital reduced. participation up to 74%.
This, by any rule, is a huge loss and prompted me to decide to review the historical yields of Greek sovereign debt in recent years to try to unite history in a context of risk for investors.
In 2008, when the credit crunch occurred, sovereign debt was considered a risk-free investment by all credit rating agencies. Being risk-free meant that financial institutions could invest in these assets and not contain any reserves for potential losses on these investments. At the time, 10-year Greek bonds were trading at a yield of just under 5%.
In May 2010, the international financial community realized that the Greek government had no control over its finances and that it had prudently borrowed from the eurozone side and Germany’s solvency. You might think this sounds like a teenage drug addict wandering around “lending” his parents ’credit card …
The first aid package that provided 110 billion euros to the Greek government was announced. Greek sovereign debt yields rose to 12.5%, meaning for sovereign debt that the market believes it would die.
The political ramifications in Europe of a possible Greek default and the possible exit of Greece from the euro led political leaders to establish the European stability mechanism that would come into action in mid-2013. It was probably already accepted in circles politicians that Greece would fail to do, but the ESM may prevent some other European countries from going down the same path. Politicians were looking for a way to continue the great European experiment instead of solving Europe’s economic problems.
In July 2011, a second bailout package was announced for an additional € 109 billion; it was only a matter of gaining time to ensure that when Greece was definitively imposed, it could be done in a more orderly manner. At that time, the ten-year gold rate was over 17%.
We now know that Greek debt has been restructured, with potential losses of up to 74% for bondholders. This, for an average person, would be considered a defect. In the world of finance, however, we have to wait for the International Association of Swaps and Derivatives (ISDA) to meet in order to determine whether this is a default or not.
You may be wondering why this is important. The reason is that many financial institutions acquire Credit Default Swaps (CDS), which is like an insurance policy on whether Greece would default on its debt. If ISDA determines that this is a technical breach, it will result in default swap payments of 3.2 trillion euros (claims, as insurance).
Personally, this would not help fill the chasm created by the loss of value of these assets. This insurance payment only compensates bondholders for less than 2% of the capital they have lost.
Following the history of Greece over the past few months has led me to think about risk in a different way and how the market is trying to price risk. Before dying, 10-year Greek bonds yielded 23.1%. When sovereign debt is so high, it would suggest that default is very likely to occur. Could you argue: 23% of income offsets a capital loss of 74%? The answer is obviously no; and we can make this statement with the advantage of retrospect.
The deepest question I think is what this says about professional money managers; why were they happy to accept this risk? Is it because they weren’t really risking their own money, but investors and shareholders? It also suggests that the market does not calculate risk very effectively either and this seems to be the case, mainly because the same thing happened with subprime lending in 2008.
I think people need to start thinking about risk in a more fundamental way and not accept what financial advisors and professionals tell them, as the evidence suggests that they themselves are not doing very well.
What this teaches the enlightened investor is not to allow someone else to take control of your investments, but to manage them yourself and decide what is the most appropriate commitment to accept.
There are many investments available that will give investors a good exchange of risk / return. An investment I am currently looking at will only allow you to risk 20% of your capital at a time, but with the opportunity to get an average annual return of 20 to 30%; sometimes more.
This, for many professional money managers, would be considered high risk; but then, these are the same money managers who decided to invest in Greek sovereign debt …
I think we are now in a period where the above investment rules and protocols no longer apply. We must begin to approach investment in a new way and not accept the principles and advice that so-called experts have been giving us over the years.
Creating your own investment experience and your personal financial plan is, I think, the best way to go. In my opinion, the investment has just made a paradigm shift. For you, it would be an important advantage to consider future investment.