German taxpayers will pay the Greeks\’ bills and aid Europe\’s banks as they continue to profit from 20% interest on their sovereign loans.

Are we sure that Sir Simon knows what he\’s talking about?

First error: no one at all is getting 20% on sovereign loans. A loan is not a bond: very different things.

No one at all has contrated a loan with a eurozone state which has 20% as the interest rate being paid. Thus no one is profiting from a 20% interest on a sovereign loan.

However, there are bonds which are trading at below par.

(For the n00bs, bond prices and yields move inversely. You might issue a bond at par (ie, here\’s a £100 bond, cost you £100 Guv\’) and at 10% interest. But people buy and sell this bond on the secondary market and the price moves around. Say interest rates halve in general to 5%. Your bond will now trade above par, at say £200 for a £100 face value bond (to keep things simple, we\’re assuming these are perpetual bonds, no redemption date or day you get the orginal £100 back.) because everything else being equal I can get £5 interest each year by bying a new £100 bond at 5% or by spending £200 on an old £100 one at 10%. And prices can also fall: say no one likes those old £100 bonds at 10% any more. People who have them sell them and people who don\’t don\’t want to buy them. The price falls to £50. But now I\’m getting £10 interest on my £50: a 20% interest rate.)

And it\’s those bonds which are trading below par which are offering those 20% interest rates. Far from this showing that European banks are profiting from 20% interest rates, the 20% interest rates are evidence that they\’ve just lost half their money. And it\’s very difficult indeed to call losing half your money making a \”profit\”.

On the rest of it he\’s alarmingly correct.

3 thoughts on “Eh?”

  1. I’m not sure where the 20% figure comes from ? 5 yr benchmark GGB’s have YTM’s of around 15%, whilst 10 yr’s are around 14%. Both are trading around the 60 level (if you can get a bid). Simple yields are around the 6% and 10% levels respectively.

    Butu hey, truth and good stories etc ..

    Tim adds: Well, in my example, the 20% comes from my having made it up as an example. As to Sir Simon, I have no idea.

  2. Tim,

    What are the consequences, economically, of the” minimum payments forever” approach that the Euro-clowns seem to have taken for Greece (and presumably the others) yesterday?. Presumably it will keep them going a while longer but leaves collapse only armslength away.

  3. Mr Ecks – doesn’t it just come down to “Do you feel inclined to loan Greece more money”?

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