Weighing the rewards of risky Greek debt

German government bonds offer investors a guaranteed loss on paper maturing up to eight years ahead. Losses on Greek government bonds are not guaranteed, but seem so certain that investors are eschewing yields approaching 30 per cent on the bonds due to mature in 2017.

Both may be overdone. But the question for today is whether the reward on offer from Greek debt is yet high enough to cover the risk that they are not paid back.

The easiest way to approach this is to look at the bond price, rather than the yield. The longest-dated Greek bond, dated 2042, trades at 42 per cent of face value (see chart). It is down sharply from last summer, when Greece was fleetingly able to issue its 2017 and 2019 bonds to bondholders now much regretting their gullibility. But the bond price is about where it stood for much of 2013, and still far above its low of just 11 per cent of par, which it hit when default and eurozone exit seemed certain in 2012.

After a raid on local authority cash this week, Greece is likely to be able to struggle through to June or, with luck, July before running out of money. However, default is inevitable without a deal with creditors.

The past five years have seen Germany repeatedly push countries to the brink to force them to accept reforms, then step back just before they go off the edge. This time looks worse: Greece's relationship with its creditors has all but broken down, and compromise will be harder. Like Wile E. Coyote, Greece may already be over the cliff and running on air, just waiting for reality to take hold.

Deciding the outcome of eurozone politics is little better than gambling. Greek bonds will clearly rebound, and yields fall, if a deal is done. But they offer far less of a margin of safety than they did back in 2012.

Some believe that even if things go wrong, Greece might stay in the eurozone and perhaps even service its bonds. After all, the bonds, and local bills issued to the country's banks, make up less than a fifth of total debt. Defaulting on its official creditors is much more important.

Investors should take little reassurance from such scenarios. In a crisis, everyone will lose. The case for Greek bonds is that crisis can be avoided, but it looks less likely every time the politicians open their mouths.

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