Government Debt: Do NOT own it!

When it all goes “phut” your rights will not be respected.? They’ll change the law to screw you over.

How do I know this??? I speak from experience.

Who screwed me over?? I blame the European Central Bank (ECB).? In my opinion they contrived to have laws changed to deprive private citizens (like me) of their rights so that the ECB would get paid in full, at the expense of everyone else.

Background:

In 2009 it was discovered that the Greek government had been lying about its statistics.?? The financial situation was much worse than claimed.? (n.b.? there’s nothing new about fake statistics.? There’s lies, damned lies, and statistics)

?Greek Bonds Plunge in Price

As a result, the price of Greek bonds plunged, and they risked defaulting.? This would have been a disaster.?? It could have led to a collapse of the eurozone and a breakup of Europe itself.?

€110 billion loan

To prevent this from happening, the “Troika”, (European Commission, European Central Bank, and International Monetary Fund) helped Greece meet its existing bills ?with a loan of €110 billion. ?The loan was made in 2010.? The loan was conditional on Greece implementing severe austerity measures.

Despite the bailout, nobody trusted the Greek government anymore.? There were allegations in 2011 and 2012 that they weren’t cutting costs as much as promised, and instead spending the bail-out money on their salaries and other social payments.?

Consequently, the prices of Greek bonds were plunging to new depths.?? It was widely expected that Greece would sooner or later default, or that some sort of creditor agreement would be reached involving a haircut.? Hopes of a second bailout were reducing.

?The ECB buys up Greek Bonds at Bargain Prices

The plunging price of Greek bonds was a problem for European Banks.?? It could have caused a second Global Financial Crisis, possibly worse than that of 2008.? You see, when the price of a bond goes down, it’s an unrealised loss for the bank.? That can cause the bank’s capital to be wiped out causing a run on the banks, and a systematic collapse.?? To save European banks from collapse, the ECB was buying Greek bonds from the banks at heavily discounted prices of 50% to 70% of face value.?

Was I Mad to Buy Greek Debt?

I liked the price of Greek bonds.?? I decided to buy a bond priced at 43% for face value!??

Was I mad?

Absolutely not.?

I know what bankruptcy and defaults means.? It means you don’t get paid.? However, you have a claim on the assets of the defaulter (e.g. it’s ships and planes).?

?"Haircuts"

Default was a risk, that I understood and accepted.? However, the widely held view was that Greece would reach an agreement with its creditors for what is known as a “haircut”.? A haircut in the context of debt restructuring means a reduction in the principal value of the bond.

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For example, if you had bought €100 nominal of a bond, and the agreed “haircut” is 60%, your nominal reduces to €40.? So, in my case I had bought the bond at 43% of face value.? If the agreed haircut was 60%, I would only get back 40%, losing 3% or 6.9% of what I had paid.? I knew this.? It was a risk that I, (and many others), wanted to take.? We expected a haircut in the 50% to 60% range.? Nobody ever foresaw what was about to happen.

Negotiations for the haircut were carried out by the largest holder of Greek bonds – the ECB.? Don’t forget that they had been busy buying up €100s of billions of Greek bonds from the banks at 50% to 70%.

The ECB Couldn't Withstand Such a Loss?

But there was a problem for the ECB.?? Its capital was less than $11 billion.? A haircut below what it had paid for the bonds risked wiping out its capital and reserves, potentially destroying the European Banking system.? What’s more, some creditors (“the wicked hedge funds”), might not agree to the haircut.?

Pari-Passu - all Holders Should be Treated Equally

Under Greek law, and European law, all creditors had to be treated equally.? Everyone gets a vote according to the size of their holding.?

?Greek Law changed

European Commission got Greece to juggle the laws so that they would get repaid 100% (in return for the ECB making them a new loan).? Small investors, like me, got diddly-squat.?? Under the new Greek law “pari-passu” rules (everyone being treated equally) went out the window in favour of a “Collective Action Clause (CAC).? ??

The ECB Votes for Itself (Not al all Egocentric)?

Effectively the CAC gave the ECB the right to decide who got paid, and who didn’t. ?And that’s what they ECB did.? They effectively said “We get paid.? You don’t”.

The Central Bank got repaid in full, and everyone else, me included, could go whistle.? We received some sort of long-dated low-interest paper which was worth a fraction of what it said.? It was worth so little. I’d rather have received nothing.

Unequal Treatment of Creditors is Good for you

The differential treatment of creditors was a very controversial aspect of the “restructuring”.?

ECB Sued?

A few of the investors (not me) had enough money to take the EC and Hellenic Republic to court at the European Court of Justice (ECJ).?? There were several cases.? Unfortunately, all private investors who went to court lost.? Not only that, they were made to pay costs as well.

Compensation Denied?

Small investors, like me, would receive no compensation for the ECB’s unfair treatment.

Taking my Money Was For My Own Good (Apparently)

The ECJ seemingly accepted that the ECB broke European Law in causing private individuals (like me) to suffer a reduction of their assets for their own “protection”.

The ECJ ruled that “None of the arguments put forward by the applicants demonstrates that the ECB committed a sufficiently serious breach of rules of law conferring rights on individuals. Accordingly, the applicants’ claims for compensation must be rejected for that reason alone,

The ECJ ruled that the differential treatment of ECB-held bonds as opposed to those held by private investors did not entitle the latter to compensation.

Changing the Law Relating to Bind Investors was Legal?

The court found that the changes in Greek law, including the implementation of CACs, were legally justified.

Legitimate Public Interest?

The need to stabilize the Greek economy and, by extension, the Eurozone, was considered a legitimate public interest that justified the differential treatment of creditors.

"You can Afford it"

They found that it was not an intolerable impairment of the applicants’ right to property.

Not a Disproportionate and Intolerable Infringement of Your Rights?

They concluded that the actions were “in line with the public interest objective of ensuring the stability of the Euro-zone banking system as a whole and is not a disproportionate and intolerable infringement of that right."

Thank Me, That You Still Have Your Euros

So, for those still using the euro today, you can thank me for unwillingly saving the euro.

More InformationCourt Case

For more information look up General Court of the European Union - Judgment of May 23, 2019 in the case no T-107/17 Steinhoff and Others v ECB (This is one of several cases.)

Big Boys?GET Paid - Not You

The bottom line is that they changed the law so the big boys could get paid in full to the detriment of the small investor.

The Euro Wouldn't Exist but for the Unfair Treatment of Small Investors

Do I agree with the ECB’s actions and the Court’s approval?? Answer: Despite the unfair, non-equitable reduction in value, any other decision could have seen a collapse of the eurozone, and maybe of the break-up of the European Union itself.? We might be living in a more chaotic world.

Don't be a Bag-Holder

So, yes, I agree.? But I won’t be a bag-holder twice.?? I’ll never buy a government bond again.