Financial reporting at The Guardian

Oh dear:

Greece passed its first key test of investor confidence with the successful sale of short-term treasury bills.

OK, bills, short term debt instruments.

The embattled Greek government raised an estimated €1.6bn (£1.3bn) in an overscubscribed bond issue

Err, no, bonds are long term debt instruments. They\’re not the same thing.

Greece\’s recovery plan was working even if Athens had to pay rates of return that came in at 4.55% for the six-month bonds and 4.85% for the 12-month ones:

No, these are bills, not bonds.

This might sound like mere pedantry (what, from Timmy?) but actually it isn\’t. Bills are less than 12 months maturity, notes are 2 to 10 year and bonds are longer than that. OK, still mere pedantry….except, when you\’re looking at the actual debt burden a country faces you also need to look at the maturity of that debt burden.

How much of the debt do you need to refinance and when? If all you can issue at reasonable interest rates are bills then you\’ve only delayed the crunch of refinancing by a few months. If notes by a few years and if bonds, well, you\’ve kicked it far enough down the road that it\’s all someone else\’s problem. Note that interest rates are (normally) higher for bonds than notes and for notes than bills.

And Greece\’s problem is that it cannot really issue bonds at anything like an interest rate it wishes to pay. Which means, a This Time is Different shows, that as earlier bond and note issues mature they\’re refinancing them with bills (and some notes) and thus reducing the average maturity of the entire debt. Which means again that in the next few years there will be even more that they\’ve got to refinance. Not just the bonds and notes maturing next year and the year after but also all those bills they\’ve issued this year as well.

The very distinction between bonds notes and bills is crucial to understanding the refinancing spiral. So a leading newspaper like The Guardian should really make those distinctions: always assuming their reporters know the distinctions and don\’t just think that they\’re synonyms. Might just let them get away with it in a column or a news piece, but really, not in the business section.

14 comments on “Financial reporting at The Guardian

  1. This is a US distinction that doesn’t necessarily hold in other countries. Greece certainly has a 10yr bond, as does France (from 7yr) and Germany. I’m not sure Austraila has bills or Canada notes.

    More generally shorthand is they are all government bonds, which is shorthand for bills/notes/bonds, e.g. http://www.bloomberg.com/markets/rates/

    I don’t understand the refinancing thing so much. If the debt is short-term it is also being paid off, so the outstanding amounts are the same. And if investors in the secondary market were willing to hold Greek debt at (say) 7%, why won’t they be willing to buy it at the same?

    Tim adds: But it’s not being “paid off”. It’s being rolled over. Greece is still running a budget deficit so it’s debt is still increasing, remember? And the shorter the debt instrument that you roll over the old debt into then the sooner you’ve got to refinance it all again. Imagine (as a thought experiment) all teh debt being issued as bills. That would mean Greece needs to borrow 400 billion each year….refinance the entire debt every year.

  2. It’s a bit like what Northern Rock were doing – raising all their finance in the short term money markets – no problem when things are good – mega disaster when they are not.

  3. It is being paid off, and then new debt is being added. As opposed to nothing happening.

    So if investors are willing to hold Greek debt at (say) a market rate of 7% (and if they weren’t they would sell on secondary market), and then the Greek government pays it off and issues new debt at7%, why won’t those investors be happy to buy it? It seems odd that you are happy to hold a 1yr bill up to and only up to the point its paid off.

    Tim adds: Ah, you’re confusing yield and yield to maturity.

    So, I bought 100 nominal of 4% paper. Imagine it’s perpetual, for a moment. Yields change to 8%. My 100 nominal is now worth 50 actual.

    OK, now bring in a maturity date. The loss in the value of my bond depends on what that maturity is. For bills, not very much (for I’m only losing a few months interest but I get my 100 back at maturity).

    But I can’t sell my 4% bond at 100 when yields are 8%. I’ve got to wait until maturity to get my 100 back and then reinvest it….at 8% this time. Now I might well be happy to invest at 8%. Indeed, that’s why yields have gone up, because new buyers are only willing to invest at 8% rather than the former 4%.

    So the interest payable by the issuer keeps going up. The debt spiral.

  4. No, but on a 4% bill say of half a year maturity if the interest rate goes to 8% the price is going to fall to 98. So you can sell up and buy an 8% bond, or you can keep it. As the yield-to-maturity is the same this is basically the same thing.

    Obviously there are advantages to borrowing long – changes in the interest rate affect you only slowly. But aside from the reduction in uncertainty (a good thing) this can be a good thing (if rates are rising) or a bad thing (if rates are falling). Consider the advantages/disadvantages of a 25yr fixed mortgage.

  5. “It is being paid off, and then new debt is being added. ”

    No, it is being paid off by new debt, thus the new debt needs to be added (or at least agreed) before paying off the old one

    “Obviously there are advantages to borrowing long – changes in the interest rate affect you only slowly. But aside from the reduction in uncertainty (a good thing) this can be a good thing (if rates are rising) or a bad thing (if rates are falling). Consider the advantages/disadvantages of a 25yr fixed mortgage.”

    Correct, but the problem (and the very point of Tim’s posting) is of course that Greece is not in a position to be able weigh the pros and cons of borrowing long and short against each and then deciding which one is the best for them ’cause no one will lend them money for a long period.

  6. Your first point makes no difference to my point, which is the amount of Greek debt investors are being asked to hold is the same in both situations.

    I took Tim’s article to be arguing that short-term debt was by its very nature added to your debt woes, and my point was ‘it depends’. It seems to me that if we’re talking about £400 + £50 (if no debt being rolled) or £400 – £50 + £100 (if £50 being rolled) it doesn’t make a huge difference.

  7. Matthew, you’re assuming that a short-term lender will be happy to renew. Presumably one of the reasons for lending short-term is that the money will not be available in the medium term.

    As Tim says, Greece will be forced into constantly looking for new lenders from a pool that is not as large as that from which it is currently borrowing.

  8. From that conversation let me see if I understand the issue.

    When I am credit worthy and have a good steady income I can borrow longer term at cheaper rates. As I lose my credit worthiness and my income becomes erratic or doesn’t cover my standard of living I find it harder to borrow long term and am forced to borrow shorter term at higher rates.

    If the loans on the short term borrowing are interest payments only and my credit worthiness deteriorates I will find it harder to get a new loan to pay off the old one and any loan I do get will be at ever higher interest rates?

    Eventually, nobody will lend me the money to roll over the loan and I will default and become bankrupt.

    Right?

  9. Borrowing long-term is sensible for making long term investment for the reason Matthew said, a reduction in uncertainty. The problem is that governments borrow long-term to invest in short-term gain, namely winning the next election. Thus I think that it is good that governments should be forced to borrow short-term. The more frequently they have to go to the market and refinance, the more feedback they get from the market on their behaviour. Greater uncertainty for governments means a better outcome for the citizens in the long run.

    That would mean Greece needs to borrow 400 billion each year….refinance the entire debt every year.

    Every year sounds good to me, failing that the maturity date of all government debt issued should not be later than the date of the next general election.

  10. “Matthew, you’re assuming that a short-term lender will be happy to renew.”

    Well yes, because there is a secondary market. I mean I understand that my mortgage company who lent me £zk in 2007 for 3 years might not be keen to roll over my loan in 2010. But there’s no secondary market in mortgage, so they only way they can get out of it is to haul it in.

    However government bonds are different, you can sell them to someone else. So if the lender hasn’t sold it to someone else, I’d have thought it means they are happy with the current yield, and so would be as happy with another similar one?

  11. Matthew:

    1) Secondary markets don’t have anything to do with rolling over loans. One (secondary markets) is to do with loans before they have matured, the other one once they have matured. The fact that there is a secondary market might increase the attractiveness of issuing a loan or (buying a note/bondbill) as you can get if your preferences change. It doesn’t help you very much if the guy you’ve lent to is about to default ’cause then no one will want to pay you anything (or very little) for your loans/bonds/bills/notes

    2) In most countries there is actually a secondary market in mortgages (albeit they are not being traded on an open exchange)

    3) the fact that a lender is happy with a current yield doesn’t say anything about which yield he will want in the future. That depends on a load of other factors, such as what he can get investing elsewhere, the default risk, etc. These are all factors that change over time. Which is of couse, yet again Tim’s very point. If you, as a government, want to have piece of mind you do not want to have to refinance a too large part of your loans every year.

    Note 1. all of this is of course excluding completely any notion of transaction costs which is yet another reason for why you don’t want to refinance too often.

    Note 2. Ed does makes a perfectly reasonable point from the perspective of a voter/citizen in a situation where they government is about to indebt itself – but in the Greek case, we’re way past that as they’ve already indebted themselves just about as much as one can without defaulting

  12. Emil,

    1. Yes, they do. They tell us at what price people are willing to hold bonds from that country. This is a very good guide to what price you can issue bonds at.
    3. I disagree. The best forecast we have of what price someone is willing to accept tomorrow for something is the price they are willing to accept today, I think.

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