Note to readers in 33 years of investing I have never bought, never owned. and never plan to own US Government debt. So I can opine here with abandon knowing I do not have a dog in this fight.
The new Greek and European Bank plan to deal with the debt of the Greece is nothing more than default on their bonds. The deal simply explained means that the European Bank will redeem Greek bonds and issue new bonds for 79 cents on the dollar, but in truth the deal will mean bondholders are really only getting a new bond for 67 cents on the dollar since the interest rates will be lower than are currently being paid to the bondholders. Add in that the Germans mostly and other European taxpayers are on the hook as collateral for the new bonds since everyone knows that the Greeks can not pay for these bonds either. The only thing holding up this deal is that there is the guarantee of payment by the European Bank. So the people of Greece and the government of Greece just keep on keeping on with their overspending and non payment of debt. Wonder who will step up and buy these worthless securities? Could be time for the European Bank to begin printing money for the first time like the US federal reserve has done for years to buy the bonds themselves. Now that would be serious ground breaking in a Europe that has been historically horrified of any inflation. Read here, old people get really screwed and Europe is full of old people.
Now you can be sure the people and governments of Ireland, Portugal, and Spain are taking a look at this and saying if the Greeks can default then why can't we too. Add in that Italy's latest efforts at reining in their problems has only delayed the day of reckoning there. The Italians might be smarter than others as they have put much of their bond maturities further out in years than others, but of course at higher interest costs. France will be the next country up in this ring of debt as they also have entitlements that are not sustainable in their budget either.
Now if you think your political leaders in Washington DC, especially those who believe money just happens and is not earned, are not looking at this paying only partial value for redeemed bonds as well then you my friend are a fool. If these other countries can reduce their debt load by simply issuing new bonds with reduced face value then why not do it here in the US. Besides the game can be pushed on a believing public that the evil, rich, and greedy millionaires and billionaires are the ones taking the haircuts. Of course no one will mention that US states, pension funds, many individuals, and retirement funds all posses US government bonds. But again that is their problem and the purpose would be to rid the US FEDERAL government of difficult bond payments and allow further increased government spending on those who would be said to need it worse. Add in the politicians who do this will win the adoration from voters who have no holdings in US bonds and likely get reelected. Laugh if you will, but if we get in a real bind and the proper adults are not in a position to say no remember you heard it here first. Quick name one adult in Washington currently.
Also note that none other than Warren Buffett has suggested this might happen during the 2009 meltdown of bond values. Bill Gross, no bond dummy himself, has been selling the US government securities out of his PIMCO holdings for some time now. Now this is not to say US government bonds are not safe, this just states that people of influence and serious amounts of assets are lessening their holdings of these bonds currently. You be the judge here.
The current debate on the debt ceiling could get interesting as well. Let's assume that the sides do not agree and borrowing capacity is stopped. First off the only reason there might be a default is because Obama decides to stiff bond holders and pay other government bills. Yes, I know the law says bond holders are the first to be paid from any government revenues, but in this politicized environment who knows who will be first in line. Add in that the president has shown he is not to be constrained by law, note the bankruptcy deals for Chrysler and GM where bondholders were stiffed against current standing law. Now Obama could pay Social Security and welfare recipients first, or could pay government contractors first, or could pay bond holders first, etc. With around $200 billion of revenues coming in monthly and needing another $100 plus billion monthly to pay all debts the options, or actually targets, are numerous. The most obvious will be Social Security or bondholders to get the most political punch. Social Security payees are a big block of voters and with Senator Schumer from NY, who scuttled the deal last weekend, spoiling for a fight this pick packs punch for Democrats holding onto the US Senate next year. Stiffing bondholders gets punch from those who hold serious influence in Washington DC since they have the ear of people in positions of power. Ain't this fun? Well maybe not if you hold bonds. If I was a betting person, and noting of who got stiffed last time bondholders were involved like GM, I vote for bondholders getting stiffed. And you thought your US Government bonds were safe? Also if you do not think the no deal scenario could happen, remember this crowd believes that no crisis should go to waste.
All this debt default is nothing more than the unraveling of the debt cycle that started buildup around 1965 and is unsustainable even with the biggest of suggested tax hikes. Frankly I do not know where this will end and neither does anyone else. But I do know the day of reckoning for Europe and the US is upon us right now and between now and about 2018 or 2019 these things will be either solved or let to unravel in a viscous cascading of defaults. Now maybe you fell comfy and safe holding your US government bonds or any other country's government bonds, maybe you feel safe with your cash or CD as the fed prints more dollars making them worth less with each passing day, but I do not. You can go about your life and weekends with no worries, but there is not a living person in the US who will not have a very serious lifestyle change if something is not done.
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