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Sunday, March 11, 2012

Is 13,95% on your original investment a good deal?

It is quite amazing how much relief (if not applause) is being voiced over the unique opportunity of losing about 86,05% of one's investment. How do I come to that figure?

It all depends on how the new bonds will trade. So far, I have read comments that they are presently trading, before all i's are dotted and all t's are crossed, between 20-30%. One can only hope that they will be trading at higher rates once the i's are dotted and the t's are crossed.

Assume they will trade at 30%. This means that holders of 100% debt accepted, in lieu of payment, new and better bonds for 46,5% thereof and they now see those bonds trading at 30%. The simple formula is: 

46,5% x 30% = 13,95%

Now, if I am an investor and if I see myself ending up with only 13,95% of my original investment, I surely want a better deal. What do I want?

Very simple! All I want is the potential of an upside. In other words, I do not want to forgive all my claims for the 53,5% outright but, instead, I am willing to wait for principal and interest for, say, 50 years. If someone tells me that I should wait for 99 years, that's fine with me, too. I will not live to see the 50 years, much less the 99 years.

But there is one thing which I may see much sooner. If I accept the above type of settlement for all debt exceeding the 60% Maastricht-level, the remaining debt will be within the 60% Maastricht-level and it should be quite solid because it is in a senior position to all other debt. Thus, it should trade close to 100%.

If that happens, then the future outlook for Greece will change quite rapidly. And if accompanied by some sensible growth strategies, Greece might soon be in an upbeat mode. And then the above evergreen bonds which started trading at near 0% will begin trading at higher rates. Mind you, something which starts at 0% and goes to, say, only 2% has just experienced an infinite percentage increase!

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