Buenos Aires to Athens—The Road to Perdition

April 3, 2012

The recent debt restructuring in Greece, which imposed up-front losses of about $130 billion on bondholders (mainly European banks), and all-in losses of more than 70 percent on a net-present-value (NPV) basis, is actually the third time in the last decade that a sovereign workout (1) has been driven largely by political considerations and (2) has led to the erosion of international creditor rights and the rule of law.

The road to perdition for investors starts out in Buenos Aires (in default since 2002), winds its way through Quito (2008-2009), and has now reached Athens in 2012.  Time will tell where it will be extended next - most likely, within Europe.  The lesson is that while government bonds are usually low-risk investments, especially relative to corporate bonds and complex structured securities, on occasion these obligations are perverted or ignored by governments lacking in ability or willingness to pay.  Each of these rare instances sets a roubling precedent worthy of reflection.