Earlier this week Greece announced updated fiscal numbers and the deficit was way bigger than anyone anticipated. It all seems like a never ending story, doesn?t it?
The good thing about investing is that you can get some of your new ideas just by watching the news.
For me it has sometimes been quite worthwhile to actually get a feeling for the public sentiment and then form my own opinion (most likely contrary to public sentiment).
Basically all news coverage about the Greek bailout / possible default at some point or the other mentions the so-called credit spreads bonds issued by the Greek government now offer.
A credit-spread tells you how much more interest you get by taking on the Greek credit and default risk compared to buying, a supposedly, risk-free German government bond.
So, with their two-year bonds interest rates now greater than 10% per year is it time to buy some Greek bonds for your portfolio?
I strongly urge you to avoid the temptation, for the main reason: the return you get by far does not justify the risk you take on with these bonds.
Buying government is materially different from buying bonds issued by companies.
As is the case with all country debt the repayment does not only depend on the ability to repay but also the willingness to repay.
At least with corporate bonds you only have to deal with the ability to repay.
Similarly to all countries the fate of Greece strongly depends on political interests and whether or not institutions like the IMF will intervene.
History has shown us that countries default occur significantly more often than most investors think. It’s no surprise that in most cases the investors who held government bonds had to pay the bill through either a reduction of capital or an extension of maturities or both.
Greek bonds do offer a decent return at the moment but, I do not believe that investors should compromise their return-OF-capital with their return-ON-capital.
Not to lose money often is the key to actually making money.
Rather wait for more attractively priced opportunities where the risk / reward balance is more favourable.
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