|Europe Agrees on New Bailout to Help Greece Avoid Default... Really??|
|Written by Wilfred Ling|
|Wednesday, 22 February 2012|
I read with amusement on the latest news in which a bailout package has finally been agreed upon. You can read the news such as this one: HERE. In the news, it is said that as a result of the new package, Greece avoided a default.
To financial advisers, fund managers and man-in-the-street, a default is simply a broken promise. In the context of bonds, a default occurs when the bond issuer fails its promise to repay the capital (or known as the 'par' value) at maturity and/or unable to pay the agreed interest (or known as the 'coupons'). According to the news, Greek bond holders had previously agreed in October last year to take a 50 percent loss on the face value of their bonds. Now, they agreed to take another 53.5 percent loss on the face value, the equivalent to an overall loss of around 75 percent. To me, it is already a default - not once but twice (once in October and another one now). The bond issuer broke its original promise and as a result bond holders suffer capital losses. Although bond holders agreed to accept such losses but a broken promise is nevertheless a broken promise.
The lesson is this: there is a difference between what politicians and mass media say and quite another in reality. Those who wish to invest need to ensure they are educated enough to know better than journalists and politicians!
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