Anyone who follows this news this morning has heard of a deal to accept bond holders’ Greek sovereign debt of b 1,172 billion. In financial fraud, bondholders have had their hair cut, which means they will not receive a refund of all their capital once the bonds mature.
Statistics released this morning show that the potential debt write-off is down 4%. This means that if you borrowed (or invested) 100 100, you will get 24 back. Good deal? Doesn’t sound like me!
I can remember a quote that once said that this is your problem when you have 11,000 in the bank, this is your problem when you owe them 1 million. Ownership of Greek government debt has become a problem for bondholders, not a problem for the Greek government.
By “bondholder”, who do we mean? It turns out that the main holders of the Greek sovereign debt are the Greek banks and the major banks in France and Germany. They may be the main losers, but there are probably a large number of financial institutions, pension funds and unit trusts who have invested a portion of their capital in these bonds, with the effect that their holding share has been reduced by 74%.
This is a huge loss by any criteria and I decided to review the historic historical yields over the last few years with Greek sovereignty in an attempt to put the story together in terms of risk for investors.
When the credit crunch broke out in 2008, Sovereign was considered a risk-free investment by all credit rating agencies. Being risk-free means that financial institutions can invest in these assets and do not hold any reserves against potential losses on these investments. At the time, Greek 10-year bonds were trading at just under 5%.
By May 2010, the international financial community had realized that the Greek government had no control over their financing, and that they were largely behind Germany’s creditworthiness as part of the eurozone. You might think it’s like teenage drug addicts “lending” their parents’ credit cards …
The first aid package was announced, giving the Greek government 110 billion euros. The yield on Greek sovereign debt has risen to 12.5%, which means the market for sovereign debt believes it will be predetermined.
The possible Greek default and the possible departure of Greece from Europe led to political turmoil around Europe that led political leaders to manage European stability that would take effect in mid-2013. It was already accepted that Greek would probably be the default in political circles. , But ESM could stop a few other countries in Europe in the same way. Politicians were looking for ways to continue the Grand European experiment rather than solve Europe’s economic problems.
The second bailout package was announced for another 109 billion euros by July 2011; It was bought in free time to make sure Greece could be made more orderly when it finally defaulted. The 10-year gilt rate at this time was more than 17%.
We now know that Greeks have been restructured, with potential losses of up to 744% of bondholders. This, in turn, would be considered a default to the average person. In the world of money though we have to wait for the International Soups and Derivatives Association (ISDA) to determine if it is an international default!
You may wonder why this is important. The reason is that many financial institutions buy credit default swaps (CDS), which is like an insurance policy whether Greece will default on its debt. If the ISDA sets it as a technical default, it will trigger a credit default of 3.2 billion euros (in claims, insurance-related cases).
Personally it will not help to fill the garbage created by the depreciation of these assets. This insurance payment compensates the bondholders for less than 2% of the lost capital.
Following the story of Greece over the past few months has led me to think differently about risk – and the way the market tries to price risk. Before default, Greek 10-year bonds were earning 23.1%. When the sovereign t is the maximum it suggests that the default is probably. You could argue: does a 23% income compensate for 74% capital loss? The answer is of course no; And we can say this with the benefit of blindness.
The deep question of my belief is what it says about professional finance managers; Why were they happy to take this risk? Is it because they were not actually risking their own money, but the money of investors and shareholders? It further suggests that the market also does not calculate risk very effectively and this seems to be the case especially in the case of sub-prime nnding in 2008.
I believe people need to start thinking about risk in a more fundamental way and not accept what financial advisers and professionals say to them, because the evidence proves that they themselves are not very good at it.
What this enlightened investor teaches is not to allow anyone else to control your investments, to manage them yourself and to decide which trade is acceptable.
There are many investments available that will give investors a good risk / return trade off. An investment that I am currently looking at enables you to risk 20% of your capital at once but with the opportunity to provide an average of 20 to 30% of annual income; Sometimes more.
This, in turn, would be considered a high risk to many professional finance managers; But then, these are the money managers who decided to invest in Greek sovereignty …
I feel that we have now reached a stage where the previous policies and investment protocols are no longer applicable. We need to start investing in a new way and not accept the policies and advice that so-called experts have been coming up with over the years.
Developing your own investment skills and personal financial plan, I believe, is the best way I think investment has just taken a paradigm shift. With that in mind, moving on to future investments will be an important benefit for you.