Well our German politicians claim that the speculants are the reason for the turmoils around the EUR. Now let us see whether they may be right or wrong.
Let us assume the following situation interest rate at 10%, time-frame 1 year (to avoid compounded interest)
Now let us assume the probability on not getting back a credit is 10 % (which is extraordinarily high)
So if we spend 100 EUR today what will we have in one year.
– 100 + 110 * 0.9 = -1
This is well negative, and therfor one would not take that much of a risk
Now let’s take failure probability of 5% so the calculation is.
– 100 + 110 * 0.95 = 4.5
Well that sounds “reasonable” you get en expected return of 4.5.
When would you consiser spending the 100 whatever?
Well in case that you get “more” back.
Now let’s see what this means to bonds of Greece. The 10 % is currently a number which the Greece has to offer. So currently the markets think that Greece will not pay with around 10% probability.
Now what if the speculant thinks the likliness on failure is around 20%
When will he/she accept this rate?
– 100 + x * 0.8 = 5
So x has to be 118.75 or 18.75 % interest rate. Well Greece will not ever offer this much interest so there must be another way.
We know hat Greece will have to pay back 100 % of the value of a bond. So we can write:
– x + 100 * 0.8 = 5
-x = 5 – 100 * 0.8
x = 75
So the speculant is just willing to buy bonds if the course is that low.
You can see high risks inevitable ask for high interest and/or low prices. Now the figure changes unexpectetly.The speculants “hope” that the EU bails out the Greeks. Suddenly the
75 course is very tempting, because it’s high income with “low risk”. That’s what every speculant is dreaming of. So in fact while the other EU states
offer this credits to Greece the speculants do make a good surplus. Now is that a fault of speculants?
Who has enforced the governements to offer the credits? No one, so the politicans action to back up the Greeks will lead to a “victory of the speculants”. So it’s the other way round
it’s not the speculants will earn big while Greece fails, no it’s the speculants earn big because of “stupid” and very doubtful (legal) actions of the political leaders.
Now it’s getting really absurd. One would not buy any bonds from Greece, but the politcians say. Come on people please buy the bonds we have to help the Greeks.
So the politicans are asking the to help them back up their stupidity and raids. I can not say how distasteful that is.
The whole economic reasoning is lead ad absurdum. In fact defrauding is right, honesty is wrong. Laws are made to save the defrauders and enforce the costs of this action to the honest people.