“Getting a Haircut?”

With the last posting on the bond market I thought it appropriate to continue this theme with the expression “Getting a Haircut”. In order to raise finance governments issue sovereign bonds and the total amount owed to the holders of the sovereign bonds is called sovereign debt.

Argentina – 2001
In 2001 an economic crisis in Argentina meant that the government could no longer service its debts and decided to default. Then in 2004 it offered to swap its defaulted bonds, worth $81 billion, for new ones worth only $35 billion. The bonds were held by financial institutions at home and abroad, as well as by many individual investors in Japan and Europe. Most accepted the offer and thus lost around half their money – know as ‘taking a haircut’. Others, who held around $20 billion worth refused the deal. As a result Argentina’s name remains mud in interenational capital markets and has had to rely on other governments such as Venezuela, who by mid-2008 had bought $7 billion in Argentinean bonds, the latest of which had to pay interest rates of 15%.

Ireland – 2010?
Ireland’s sovereign debt crisis has been the focus of talks between the biggest EU economies meeting at the G20 summit in the South Korean capital, Seoul. The relentless pressure on Irish sovereign bonds has seen the yield on Ireland’s ten-year government bond nearing 9% on November 10th, 6.2 percentage points above the yield on safe German Bunds (see chart); Portugal’s topped 7%. There is real concern that unless there is a major EU bailout plan Ireland could go bankrupt. The majority of global investors predict Ireland will default on its sovereign debt, showing that weeks of efforts by the government of the onetime “Celtic Tiger” haven’t allayed concerns about its creditworthiness.

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