Savers searching for yield lament the quarter of a percent a U.S. short-term bond pays, but the bitter news out of Greece, where a 1-year government bond climbed past the 1,000% mark, is a reminder that less is sometimes more. The yield on 1-year Greek government bonds climbed over 1,000% for the first time on Monday, before settling back to around 949% on Tuesday.
Investors who would drool at the chance to turn a $1,000 investment into $10,000 in just a year are likely in no better position than the Greek mythological figure Tantalus unable to grasp the low-hanging fruit just out of his reach. Today’s tantalizing yield reflects the near certainty the Greek bonds will be succeeded by less valuable replacements in just two weeks as Greece races to settle a “voluntary” bondholder haircut with creditors before the debt comes due on March 20.
Greece set a Thursday deadline for bondholders to agree to trade in their current debt for new bonds worth less than half the old ones. Among the bondholders are hedge funds and large institutions and speculators who may have made leveraged bets that may introduce further instability in the financial system if they take the large haircut Greek negotiators are offering.
If no deal is reached, and Greece is forced to default, financial chaos is likely to reign, according to the Institute of International Finance, which represents creditors holding Greek bonds. Reuters quotes a leaked IRI document estimating liabilities surpassing 1 trillion euros ($1.3 trillion) in the event of a default, including the 177 billion euros exposure of the European Central Bank, representing more than 200% of the central bank’s capital base. The bonds of weak European nations like Spain, Italy, Portugal and Ireland would also plummet and the capital base of European banks would erode as well.
But Greek government negotiators believe they can force acceptance of a bond swap on reluctant creditors using “collective action clauses” in bond contracts that allow the decision of a majority of bondholders to bind even those opposed to restructuring.