Greece’s Private Bondholders walk out on Eurozone Debt Deal costing them 65-70% of their Investment

Posted by PITHOCRATES - January 21st, 2012

Week in Review

Imagine your neighbor is facing a financial crisis and needs to borrow $1,000.  You want to help.  So you loan your neighbor the $1,000.  Because you’re nice.  Then you see them unload a new flat-screen television into their house.  Noting that despite their financial crisis they did not change their spending habits.  Worse, when it comes time to repay you they ask if you’ll accept only $300 instead of the $1,000 you loaned them.  Because they are really struggling and need some debt relief.  If you follow this then you have an understanding of what’s happening in Greece (see Greece’s creditors leave Athens by Sophie Sassard and Dina Kyriakidou, Reuters, posted 1/21/2012 on Yahoo! News).

The representatives of Greece’s private creditors left Athens unexpectedly on Saturday without a deal on a debt swap plan that is vital to avert a disorderly default, sources close to the negotiations told Reuters…

The IMF insists the debt swap deal must ensure Greece’s debt burden will be cut to 120 percent of GDP by 2020 from 160 percent now, as agreed at an EU summit in October, and has warned that this is made more difficult by the fact that Athens’ economic prospects have deteriorated since…

Private bondholders will likely take a hit of 65 to 70 percent on their holdings…

It was Greece’s prolific government spending that caused this debt.  The private bondholders didn’t forcibly loan them money and tell them to spend themselves into debt.  No.  The private bondholders were nice.  They offered to help.  And loaned them money when they asked for a loan.  Entering into a contract with the Greek government.

People buy government debt because it’s supposed to be safe.  They chose these ‘safe’ investments because they expect to get their money back.  If they wanted something more risky they would have speculated in the stock market.  Or bought junk bonds.  But they didn’t.  They bought ‘safe’ government bonds.  Never in their wildest imagination did they ever see themselves getting screwed out of 70% of their investment.  But that’s what they’re trying to do to them.  And painting them as bad guys for not losing this 70% with a smile on their face.

So much for nice people putting their trust in contracts.

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