We’d like to remind Forumites to please avoid political debate on the Forum.
This is to keep it a safe and useful space for MoneySaving discussions. Threads that are – or become – political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.
Debate House Prices
In order to help keep the Forum a useful, safe and friendly place for our users, discussions around non MoneySaving matters are no longer permitted. This includes wider debates about general house prices, the economy and politics. As a result, we have taken the decision to keep this board permanently closed, but it remains viewable for users who may find some useful information in it. Thank you for your understanding.
📨 Have you signed up to the Forum's new Email Digest yet? Get a selection of trending threads sent straight to your inbox daily, weekly or monthly!
The Forum now has a brand new text editor, adding a bunch of handy features to use when creating posts. Read more in our how-to guide
Giving it to Investors Greek-style....
Generali
Posts: 36,411 Forumite
.....Or Subordination by the Back Door.
As some, all or none of you will know, there is a principle when you invest called subordination. This means that if you buy an asset that pays a return of some sort you rank the order in which people get their money back.
To (over) simplify, you could rank holders as senior, mezzanine, subordinated and equity. In the case of a fictitious company that has issued debt and shares with the above categories it might be that senior debt owners have to get their full interest or capital payment before owners of mezzanine debt get any of theirs.
In turn, holders of mezzanine debt need full payment before the subordinated lot get anything. Equity holders only get a dividend once everyone else has been paid.
The obvious question is, "Why would anybody buy anything other than senior debt? These bankers are as dumb as a nightclub full of footballers". The answer is that the riskier debt levels generally pay a higher level of interest (coupon) to reflect that extra risk.
Now private sector owners of Greek Government bonds were Senior investors. There was only one level of debt issued as is normal with Sovereign debt.
Then Greece needs to default and does so, none of which is news. What happens then are the interesting bits (to me):
1. Greece changes the law on investors so that if enough investors accept the default it can be forced on the rest (LINK). This law was not in place when investors bought the bonds.
2. The ECB insists that it will not take a hit when Greece defaults so it decides that Greece has to make the debt that it owns 'senior' and private sector investors become subordinated.
The thing is, #2 means that private holders of debt have to take a bigger hit. Imagine I owe £200, £100 to each of 2 people. If I can only repay £100 I can either repay one in full and the other not at all or give each £50.
The ECB have said Doing it Greek Style is a one off. They won't do it again. Well they said that they weren't going to do it at all before the Greek default in fact it's less than 2 years ago that Germany and the EU were saying that there was no need for any bail out at all for Greece, let alone a default.
Now imagine you are owed money by Portugal. They have had their bailouts. GDP declined by 2.7% last year and Government debt is about 100% of GDP if you include state-owned companies. Would you hang about to be 'subordinated'? I wouldn't.
What about if you hold French debt, or German or Dutch? I wouldn't touch it and I suspect a lot of people in the markets are coming around to my way of thinking.
Shoulda let the banks go bust.........
As some, all or none of you will know, there is a principle when you invest called subordination. This means that if you buy an asset that pays a return of some sort you rank the order in which people get their money back.
To (over) simplify, you could rank holders as senior, mezzanine, subordinated and equity. In the case of a fictitious company that has issued debt and shares with the above categories it might be that senior debt owners have to get their full interest or capital payment before owners of mezzanine debt get any of theirs.
In turn, holders of mezzanine debt need full payment before the subordinated lot get anything. Equity holders only get a dividend once everyone else has been paid.
The obvious question is, "Why would anybody buy anything other than senior debt? These bankers are as dumb as a nightclub full of footballers". The answer is that the riskier debt levels generally pay a higher level of interest (coupon) to reflect that extra risk.
Now private sector owners of Greek Government bonds were Senior investors. There was only one level of debt issued as is normal with Sovereign debt.
Then Greece needs to default and does so, none of which is news. What happens then are the interesting bits (to me):
1. Greece changes the law on investors so that if enough investors accept the default it can be forced on the rest (LINK). This law was not in place when investors bought the bonds.
2. The ECB insists that it will not take a hit when Greece defaults so it decides that Greece has to make the debt that it owns 'senior' and private sector investors become subordinated.
The thing is, #2 means that private holders of debt have to take a bigger hit. Imagine I owe £200, £100 to each of 2 people. If I can only repay £100 I can either repay one in full and the other not at all or give each £50.
The ECB have said Doing it Greek Style is a one off. They won't do it again. Well they said that they weren't going to do it at all before the Greek default in fact it's less than 2 years ago that Germany and the EU were saying that there was no need for any bail out at all for Greece, let alone a default.
Now imagine you are owed money by Portugal. They have had their bailouts. GDP declined by 2.7% last year and Government debt is about 100% of GDP if you include state-owned companies. Would you hang about to be 'subordinated'? I wouldn't.
What about if you hold French debt, or German or Dutch? I wouldn't touch it and I suspect a lot of people in the markets are coming around to my way of thinking.
Shoulda let the banks go bust.........
0
Comments
-
Legal skull-duggery in Greece may doom Portugal
Europe has ring-fenced Greece's debt crisis for now but its escalating recourse to legal legerdemain has shattered the trust of global bond markets and may ultimately expose Portugal, Spain, and Italy to greater danger.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9132216/Legal-skull-duggery-in-Greece-may-doom-Portugal.htmlThe next spasm of the debt crisis will that much dangerous if it ever comes. As the saying goes: Hell hath no fury like an abused bondholder.0 -
Well some of them anyway. Northern Rock being rescued by the British government now looks like an over-reaction.
what are you basing this on? the fact that, four years later, the 'bad' loan book, in run off mode, with artificially cheap govt funding, is acheiving a very thin profit margin, after front-loading bad debt write-offs in previous years?
if so, you seem to ignore the fact that there would have been a disorderly failure without an intervention.0 -
chewmylegoff wrote: »what are you basing this on? the fact that, four years later, the 'bad' loan book, in run off mode, with artificially cheap govt funding, is acheiving a very thin profit margin, after front-loading bad debt write-offs in previous years?
if so, you seem to ignore the fact that there would have been a disorderly failure without an intervention.
What would have happened do you think if NRK had been left to go bust do you think that is worse than what happened?
4-5 years later, UK GDP is lower than when NRK went bust, Greece has defaulted at a substantial cost to the UK taxpayer and the British Government is spending tens of billions of pounds each year more than she takes in tax.
I think we can now agree that bailing out NRK has been a qualified success at best.0 -
I would have let HBOS go bust too.
Those were the days. I remember thinking at the time as a LLOY shareholder how wonderful it was that LLOY had finally managed to pick up HBOS after years of sniffing them out at a knock down price.
I thought it was so wonderful that I kept buying LLOY shares happy to be able to 'average down'. I've never sold those shares - that big red number in my portfolio reminds me that I'm not as clever as I thought I was.0 -
Reading the original post and the first response and the recent treatment of bondholders makes me wonder what will happen if (when?) Greece needs another bond sale! Who will buy?0
-
Reading the original post and the first response and the recent treatment of bondholders makes me wonder what will happen if (when?) Greece needs another bond sale! Who will buy?
Very few is the answer IMHO.
My bigger fear is that Italy, Portugal and Spain are 'rooted' now. How can you buy the debt if you think you're going to be subordinated?0 -
The wholesale and retail money markets would have lost confidence, and there's no telling how much damage this would have done to the other banks.What would have happened do you think if NRK had been left to go bust
As things are, we carry on pretty much as normal. We still put our money in banks, in spite of pathetic interest rates. It's not because we think they're solvent - we're pretty sure their balance sheets are stuffed with overvalued assets. It's not because we believe in FSCS. It's because we don't believe any politicians have the stomach for a retail bank failure."It will take, five, 10, 15 years to get back to where we need to be. But it's no longer the individual banks that are in the wrong, it's the banking industry as a whole." - Steven Cooper, head of personal and business banking at Barclays, talking to Martin Lewis0 -
I'm not convinced that governments and central banks should be allowed to participate in the secondary markets at all, since they can't help but create a false market.My bigger fear is that Italy, Portugal and Spain are 'rooted' now. How can you buy the debt if you think you're going to be subordinated?
What are UK gilts worth when the Bank now holds 1/3 of the Treasury's entire debt, and bought most of it with money magicked out of thin air? The Bank has promised to destroy the money, eventually, but that's not in anybody's contract. What if the Bank decides it's holding the wrong asset, so it decides to offload its free gilts to fund an enterprise bank?
Certainly if I were a credit rating agency I'd be slashing the credit ratings of all Eurozone sovereign debt, including Germany's. Enjoy your weekend Angela."It will take, five, 10, 15 years to get back to where we need to be. But it's no longer the individual banks that are in the wrong, it's the banking industry as a whole." - Steven Cooper, head of personal and business banking at Barclays, talking to Martin Lewis0
This discussion has been closed.
Confirm your email address to Create Threads and Reply
Categories
- All Categories
- 353.8K Banking & Borrowing
- 254.3K Reduce Debt & Boost Income
- 455.2K Spending & Discounts
- 246.9K Work, Benefits & Business
- 603.4K Mortgages, Homes & Bills
- 178.2K Life & Family
- 260.9K Travel & Transport
- 1.5M Hobbies & Leisure
- 16K Discuss & Feedback
- 37.7K Read-Only Boards