How government debt defaults are conducted?

MikeDirnt78 (30-12-2011) wrote:

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Re: Sovereign debt question on 'yields'
Here is my possible explanation in layman terms.
Greece is technically bankrupt at the moment. The market is anticipating a default in the capital repayment for the bond which expires in 2 years. So everyone is selling short dated bonds thus driving yields higher.
In 15 years time, do you think greece will remain a bankrupt? They probably have improved their financial status. The inverted yield curve explains similarly. Sell short dated bonds and buy long dated bonds.

Firstly: Short disclosure: this thread was inspired by my question mentioned at HWZ: Invest in Gold

Hi Mike, whilst your general reasoning why long bonds might be favored to short bonds is reasonable, I think that the overarching concern here as 'Mancunian2' mentioned, something about the 'default' procedures.

Using recent Borders Bookshop SG (?PTE LTD?) bankruptcy as example, a liquidator decides who gets what in the proportions proximate to the amount left owing to each unsecured creditor at liquidation and so the concept of 'haircut' I believe should occur across the board.

A country is however a more complex matter quite unlike Borders Bookshop company as still remains a sovereign state (generally) despite 'bankruptcy'. Still, not hair-cutting ALL existing bonds equally in one fell swoop would be prejudiced if not quite indecent.

I thus accept the reasoning by 'Shiny Things' that the present overarching concern in the market pricing of Greek bonds is currently the risk of default, with 2yr bonds commanding a 10% point premium over the rest- due to the slim chance that it might be redeemed at par (EUR100 a piece I am assuming) before any the default occurs.

The reason why Greek 15yr treasuries maintain relatively overpriced cf 2, 5, 10 yr bonds is because these buyers are optimistic that the Greeks would successfully implement it austerity measures and that the ECB and IMF would indeed bail Greece out. A gambit I strongly hope turns out very much misplaced. (or was the ECB sacrificially buying the 15yr bonds?- I really hope not)- perhaps it would be good for the world if Greece were allowed to default as a lesson to governments that nobody is above the law and borrow like there is no tomorrow.

What do U ppl think?

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01Jan2012: Sovereign debt question on 'yields'