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Comment by DarkKomunalec | Hacker News Reader

As happened in Greece, such purchases result in pressure applied to the country to pay off its debts, rather than help its people. It's good in the short term, but in the long term, government debt ends up as a massive transfer of capital to the lenders.

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>As happened in Greece

Greece had the largest default in history[0], virtually all private debt holders were forced to take a ~70% haircut.

[0]: https://en.wikipedia.org/wiki/Private_sector_involvement

That 'haircut' is based on interest assumptions not actual costs. The actual haircut was only 53.5% of the face value so if you bought it from someone else at a higher discount you made significant profit. Assuming you sold it or there will be no second default.

I humbly suggest reading the book "Debt: The First 5000 Years"

Sorry, are you saying that if a bond is supposed to pay a certain interest which isn't actually paid, that this isn't a partial default because the interest is only an "assumption"? And we should only count the face value of the bond?

I think the point is more that by the time the default happened, the market already considered the bonds to be worth less then what they ended up being worth.

The fact that the market priced in the haircut does not mean there was no haircut. It just distributes the loss between different creditors. The bonds are just as much in default, representing a net transfer from creditors to borrowers.

I'm all for knocking on predatory bankers, but that's not a very compelling argument.

The borrower sold a bond at par -- so they got their $1. As the entity who bought that bond, you're fucked... the borrower isn't making interest payments and the debt is looking like a bad debt. So you sell it at a distressed value, in your example $0.53, losing half your principal investment + interest, to cut your losses.

The entity buying the distressed asset knows it's junk, which is why they buy it at a steep discount. The fact that they may make a significant profit if the borrower starts making payments is irrelevant.

At this point people start whining about predatory Goldman Sachs, etc. Notice that there was no outcry when places like Greece and Venezuela were happily borrowing and squandering money based on German credit (Greece) or temporarily inflated oil revenues (Venezuela). In the case of Venezuela, they managed to also kill the golden goose by deferring critical investments in oil infrastructure and making dumb political decisions.

Goldman Sachs has not and is not lending Venezuela any money. So, if they buy a bond from someone else at less than face value they have zero room to complain about an agreement that was not made with them. At best they are trying to make a quick buck off the person that sold them the bond and again have no room to talk with the issuer.

The bond indenture kinda disagrees with your whole premise here.

Suppose, I buy a bond at 5% interest over 1 year and it defaults after making most of the payments. If I effectively only get 1% interest the IRS says I still owe taxes on that 1% as profit.

I don't understand what that has to do with your original premise.

Profit and loss should be calculated from the actual investment not what you should get on paper.

Just because Goldman Sachs would make an amazing profit if Venezuela actually made good on their debt doesn't mean they don't own Venezuela debt, right? "Goldman Sachs has not and is not lending Venezuela any money" is patently false.

GS is buying debt that someone else had. That other group loaned Venezuela money and is now selling the debt at a discount.

Critically if GS did not buy the debt Venezuela would have exactly the same money and exactly the same obligations so the fact GS 'owns' the debt or bob the accountant owns the debt is only important in so far as GS can apply more pressure.

That's not really accurate. Goldman bought the bond from the original owner and is now a creditor.

They can and will talk to the issuer about payment and have every right to demand full payment -- the obligation to pay is not diminished by the secondary market value.

In my personal case, I had an opportunity to buy tax exempt New York General Obligation bonds at a discount during the 2008 financial crisis. I did so, although New York isn't Venezuela and the discount wasn't 50%, the interest payments are based on the originally issued amount and if I hold the bond to maturity I will get the full principal.

As an individual with 1 bond I don't have the leverage of an investment bank, but I'm still a creditor and will be get paid in the event of some serious financial crisis.

The idea that debt is transferable like this is a specific rule under a specific system. You can also loan debt so the recipient has right of first refusal on all transfers and then they could have simply bought that debt at that same discount.

I am not saying the second system is universally better, but there is a reasonable argument for and against it.

Except, it has not defaulted to the ECB, Eurozone or IMF... these institutions are insane, when asked "We owe you x billion dollars at the end of the month. We can either pay you or pay our pensioners. What should we do?", the answer was, "Well, pay us!".

The purchases happened at the secondary market. This means that this bond are already issued... this means that what you say above is not true.

Where the bonds were purchased does not affect Goldman's ability or motivation to pressure Venezuela.

Or any creditor's motivation for that matter. Debt must be paid back, regardless of who the creditor is.

Most legal systems disagree. See https://en.wikipedia.org/wiki/Default_(finance)

Society does not exist to serve contracts - it is the other way around.

I'm sorry, what? Most legal system recognize default as a breach of contract.

Also, contracts are between at least two parties. Which of these parties don't you consider being a part of society?

Most legal systems have procedures in place for when debt cannot be repaid. That is why I take issue with the statement that it 'must' be repaid.

"Which of these parties don't you consider being a part of society?" - This is a strawman. Both are part of society, but the contract between them may do more harm than good in total. And blindly holding contracts sacred quickly leads to bad outcomes (non-competes, EULAs, some NDAs, etc.)

This is the same as taking issue with the statement "one mustn't steal" because there are mechanisms for dealing with theft.

Man, the straw man fallacy on HN is like the proverbial hammer... You are talking about externalities of private contracts. Thing is, this also is subject to specific legal regulations in most Western countries. It is not subject to whichever moral judgement you are trying to fit in here.

Construction, industrial emissions, things like that are when the state can limit the civil rights of contract parties. Buying and selling bonds is generally considered not to have externalities that endanger the common good.

Yeah. But don't bet on the current government doing that. Quite the contrary

Or even the next

This is pure speculation

Banks control western politicians who will put who ever is in power under pressure to pay of the debt. I used to think people that talk like that are same as the ones that wear tin foil hats. But the last 6-7 years has made me realise that they are not completely bat shit crazy. And the world of power is power is most corrupted and the least in the news.

"And the Weak Suffer What They Must?" by Yanis Varoufakis (former Greek finance minster) has an interesting view on the mess that Greece (and indeed Europe and the rest of the world) is in. I don't think it's without flaws but it is certainly interesting - particularly his view of EU/ECB bureaucrats:

"a clueless, inefficient bureaucracy... working tirelessly for politicians with an infinite capacity to recite unenforceable rules"

On a sidenote (but likely interesting to HN readers):

Varoufakis worked as an economist for Valve[1]

[1] http://blogs.valvesoftware.com/economics/it-all-began-with-a...

That works if:

- The concerned politician has a slight sense of responsibility (even though paying banks first is less responsible to the people but has long-term goals)

- The concerned country has a minimal ability to pay

Venezuela has neither at this moment

Venezuela does have a minimal ability to pay. Eventually, default is likely, but they have paid all of their bond obligations so far. (The story you hear is that many of the bonds are held by political allies, so the payments transfer money to them.)

https://www.nytimes.com/2017/04/12/business/venezuela-oil-de...

For a second I read that as "western politicians who will put in power whoever ..."

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