A couple of friends of mine used to point to me some months ago, jokingly or seriously, who knows, whether it was a good time to buy Greek bonds due to the hight yield they had.
My response was always the same, I prefer not to meddle with state bonds, a lesson learnt from various sources and which I wrote about some weeks ago (“Inflation and assets” and “Hyperinflation and defaults in Europe”).
I guess that with all the recent turmoil in the markets and the news, one would feel less appetite for such bonds, but I still had a question: What actually happens when there is a debt default? Is the state not giving you a monthly coupon but re-starts paying the next month? Is the payment along a year postponed and re-started the coming year? Is the principal recovered?
Last week, while flying to Amsterdam I read an insightful article from The Economist about last Argentina’s debt default. The article is an eye-opener. It gives detailed account of the different difficulties and steps that creditors are going through to recover part of their money.
But as a point of reference, take the following passage:
“Argentina’s default, after a severe economic crisis, sparked social unrest and runs on banks. It subsequently presented creditors with a take-it-or-leave-it offer of 35 cents on the dollar. They considered this derisory: previously, delinquent countries had typically paid 50-60 cents. But the government stood firm and roughly three-quarters of the bondholders took part in a debt exchange in 2005. More joined in 2010, bringing the total to 93%.”
Then, what typically happens is that monthly coupon payments are stopped and creditors are presented with a take-it-or-leave-it offer of paying them back about 50-60% of what they had invested…
The 7% who didn’t join that deal are still going through legal battles. For you and I, that most probably are not going to enter into any legal dispute with a country, we are much better off far away from state debt bonds.