Who is global debt owed too?

Ark_Welder

Greece hasn't been offering to pay +25% interest, that is the level of interest that would be paid if the bonds wre bought today, so the coupon payment might be closer to 7% and it is the fall in the price of the bond that gives the return - assumsing that interest and redemption payments are met.

China has surplus capital due to its low-cost manufacturing base which is able to sell cheap goods around the world. Some of that excess cash has been used to buy US Treasuries (they're not called gilts!) to keep the exchange rate between the dollar and renminbi artifically low. This allows China to keep selling its goods to the US (and elsewhere) at low-cost - a bit like giving a loan to someone so that they can buy something from you. It is one reason why the Far East and other emerging economies will not be immune to credit contraction in the developed world once it is implemented in earnest.

sabretoothtigger

where did the non-US central banks get their dollars from?

They get it from trade transacted in dollars. USA imports more then its exports so paid goods are swapped for an IOU then that is passed round between countries to pay bills with.

Apparently the biggest debt holders are the pension and social security funds, forced buyers as they are government controlled then next is the FED who will also charge government with any losses they make on their purchases

I think the biggest lynchpin is the holders of paper money. Anyone who owns dollars and has its worth at 1 today may find it becomes half that value as all the IOU get called in. Supply and demand I reckon is all it takes to see it unwind.

Greece's solution is found by not running a deficit of any kind, that will allow more chance of borrowing smaller amounts at a reasonable cost. Even with no deficit they have to renew older debt so its an active situation, its obviously not feasible for them to have zero borrowing facilities. I think its like a bank run, its fine till it isnt then its too late.
Same could happen with USA and effect everyone in the world? Hence their actions now count more then any in future

JohnRo

Whoever it's owed to hardly matters, we as a country can't afford to pay it back and look increasingly less able to do so. Most of the talk about reducing the national debt is actually just talk about slowing the rate at which we (via government spending) are increasing it. Lots of analogies can be made to explain that, none particularly accurate but the easiest one I saw was trying to empty a bath with a thimble while the tap is running. Once you hit the overflow (long before) the person controlling the tap can see the thimble isn't working and turns the tap off to avoid wasting any more.

If most debt is owed to ourselves as claimed then that suggests we all, collectively, in the UK and elsewhere live a lifestyle that is beyond our collective means and so unsustainable, living on borrowed time and as a result the lifestyle of future generations will have to at some point make the required correction or have it made for them and suffer accordingly. They may well do the same thing we are doing and attempt to pay as much of the debt as possible forward and so on to the next generation but it's reaching the point where it cannot be passed down the line for much longer, each punt forward adds more weight and increases the strain on those left holding it. Once the creditors start locking their lines of credit because the debt they're owed isn't even getting the interest payment serviced then things are going to have to start breaking.

fair comment?

tdowson

Really interesting replies. Thanks to all so far!

The replies made a few points which in themselves would be interesting to understand:

1. Is a bond the same as a gilt?

2. "China in this case uses its spare capital to buy US Gilts, they do this to keep the exchange rate in their favour."
So how does China buying Gilts/US Tresuries (which if I now understand correctly, is a way to fund US debt) keep the Chinese currency in their favour (weaker compared to the USD)? Does the same apply to all debtor/creditor nations and currency pairs? Does, say, China buying UK gilts keep the pound stronger than the Renminbi, or India buying Swedish gilts keep the Krona stronger than the Rupee?

3. "Greece offering 25% interest on their bonds so there will be people who will take this risk (98% chance of default). The price of the bond will keep lowering and lowering until there is a price where people think "Actually, thats really cheap, I'll take a punt on it not defaulting".
So what's this about the bond 'price' lowering? I thought bonds were a way of buying, say, £10 worth, Greece gets the £10 now, and the buyer/lender gets £2.50 interest p.a. then hopefully the £10 back after however many years the bond was for. So what price is it that 'gets lowered'?

Thanks again!

JohnRo

tdowson wrote: »

1. Is a bond the same as a gilt?

As I understand it a bond is just a formal contract or agreement to repay the sum borrowed over a given time frame at the agreed interest rate. As a result the contract itself can be traded by the bond holder.

Gilding is the process of covering something or applying a super thin layer of precious metal to something, that application is then referred to as gilt.

A gilt (gilt-edged) refers specifically to the bond certificates issued in days gone by. No idea if they still have gold edges though. The phrase has since become associated specifically with british government bonds and refers simply to the perceived security of the loan and ability of the borrower to honour the contract.

The british government has never defaulted on an interest payment (but that day, though some way off, is approaching)

VT82

tdowson wrote: »

So what's this about the bond 'price' lowering? I thought bonds were a way of buying, say, £10 worth, Greece gets the £10 now, and the buyer/lender gets £2.50 interest p.a. then hopefully the £10 back after however many years the bond was for. So what price is it that 'gets lowered'?

Greece might have issued a 100,000 EUR gilt paying 7% pa to Bank A. Once the price lowers, it might be that Bank A sells the gilt to Bank B for 50,000 EUR. Greece will continue to pay 7,000 EUR (7% of 100,000 EUR) pa to Bank B, and will pay 100,000 EUR at maturity (well, they will if they can!).

When calculating an AER for only having to invest 50,000 EUR to get a 7% gilt with a notional of 100,000 EUR, this can lead to its effective yield being calculated as 25% for example.

tdowson

VT82 wrote: »

Greece might have issued a 100,000 EUR gilt paying 7% pa to Bank A. Once the price lowers, it might be that Bank A sells the gilt to Bank B for 50,000 EUR. Greece will continue to pay 7,000 EUR (7% of 100,000 EUR) pa to Bank B, and will pay 100,000 EUR at maturity (well, they will if they can!).

When calculating an AER for only having to invest 50,000 EUR to get a 7% gilt with a notional of 100,000 EUR, this can lead to its effective yield being calculated as 25% for example.

Ah. So there is a secondary market in these gilts? So investors try to resell them if they feel less confident in getting back their original stake or ongoing interest payments and cut their losses? Or if the outlook improves, then maybe the gilt can be sold for more than the purchase price - which will return the second-hand buyer a lower but more secure yield?

Can individual investors like me buy a Greek gilt, as a high risk/high return investment? If so how?

Ark_Welder

A gilt is a bond, but a bond is not necessarily a gilt...

Gilts is the term used specifically for the bonds issued by the UK government. The US government bonds are usually referred to as Treasuries, German gov. bonds as Bunds. Not doubt there are similar names of the bonds of other governments.

There is a secondary market in most bonds, which is why they can trade at above or below their redemption price (assuming that they have a fixed redemption price). Currently, all UK gilts are trading above par (i.e. their redemption price) which indicates that there is demand for them - and the expectation that they will be repaid in full (who would buy something in the expectation that they would lose money on them?)

Many bonds are directed more towards institutional investors and high net-worth investors because they have a minimum trade block of £50K nominal or £100K nominal, or the equivalent in the local currency. You may be able to buy £50K nominal for less, e.g. £49K, but that is still the sort of outlay that you need to have for some of these. It is possible for smaller investors to buy into several gilts at lower nominal amounts, though - check with your broker.

Buying Greek sovereign bonds? Affected by the credit-worthiness of Greece, its continued membership of the Euro and Eurozone, and the future exchange rate between Sterling and the Euro, and/or potentially, the Neu (sic) Drachma. Assuming that you would be able to buy a small enough nominal amount (i.e. less than €50K for example - you would need to check with your broker) then you are looking at a very high risk investment with probably little reward: the prices reflect the expectation that the bonds will NOT be repaid in full, they are currently trading at around 50% of their redemption value. Personally, I would not expect much more than this to be repaid - and probably less.

Less risky would be to buy into a distressed debt fund, but this assumes that there are ones available to retail investors (which there are, but I would not wish to point you in that direction). These funds are still high risk, but less-so than trying to buy individual high-risk bonds - although as a consequence the returns can be lower, but more likely.

JohnRo

tdowson wrote: »

Can individual investors like me buy a Greek gilt, as a high risk/high return investment? If so how?

You sort of answered your own question

Ah. So there is a secondary market in these gilts?

Perhaps look at investing in strategic bond funds, however finding out what exposure the particular fund has to specific countries and more importantly which actual bonds is not something you're going to find easy.

Of course as with all funds any potential returns are going to be reduced by the ever present management fees, while the capital risk remains all yours.

tdowson

It sounds like if one country devalues their currency with QE, that country gains a competitive advantage by making its exports cheaper, so all countries could end up chasing their currencies lower.

I've read that one suggestion put forward this week is for all the main central banks to plan a unified QE program and flood the market with cash. I assume the logic is to solve the credit problems and at the same time devaluing all currencies together in a controlled way. This seems to be the closest I've heard to any way out of this problem - the size of the debts are such that they seem unpayable, ever. Is this united QE effort a possible scenario? If this were to happen, what are the implications? Would it be a good idea to have some cash held in another currency less likely to take part in this?