15% and climbing

The continued fall in the price of Greek bonds continues unrelenting today.  The yield on 2-yr bonds has now reached an incredible 15%.

This means that if you bought €1,000 worth of 2-year Greek bonds you would expect to receive about €1,300 between interest received and principal repayments on maturity of the bonds.  This would obviously depend on how long the bonds have to maturity and the figure given here assumes that this is close to two years.

Most of this return will be based on getting the principal back as existing Greek bonds have a coupon rate of around 5%.

Turning €1,000 into €1,300 in just two years is a great return.  The reason for this is that there is obviously a great risk.  Greek bonds are cheap because markets are doubting the country’s ability to meet the interest and, in particular, the principal repayments.

Some firm numbers are given in this piece.  To buy €1,000 of a 4.3% Greek tw0-year bond due in March 2012 cost €786.70 just before the close at 5pm today.  Spend less than €800 to get €43 a year in interest and €1,000 principal in two years time.

Would you be willing to take the risk?  Felix Salmon is not.  At 15% I think it may be worth the risk.  The EU couldn’t let Greece default. Could they?

Ratings agency Standard & Poors have cut their rating of Greek sovereign debt according to Bloomberg:

Greece’s credit rating was cut three steps to junk by Standard and Poor’s, the first time that’s happened to a euro member since the currency started, as contagion from the nation’s debt crisis spread through the bloc.

Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. The Greek move came minutes after the rating company reduced Portugal by two steps to A- from A+. The euro weakened, stocks plunged and the extra yield that investors demand to hold Greek and Portuguese bonds over German bunds surged.