And the 1 year Greek sovereign debt yield breaks 1000%!
I’m really trying to follow all this stuff, but I do not understand what this statement means.
I would love a very simple explanation!
Thanx.
and the 2 year at 229.8% and 10 year bonds at 36.5%....enjoy.
What it means is that investors are assigning a high probability of Greek default DESPITE the bailout. Their spending and debt are murderous (like our spending and debt) and investors want HUGE premiums to lend them money.
PV = FV x (1 + i) ^N
PV = Present value, what you pay for a bond today.
FV = Future value, amount promised.
i = interest rate, per compounding period, 5% = 0.05, 1000% = 10
N = Number of compounding periods.
^ = symbol for exponentiation. (1+i)^N means(1+i) raised to the Nth power.
It means that Jimmy the Greek is laying 10 to one against Greece paying off.
I am not sure whether this will suffice as a 'very simple' explanation, and others have already given some good answers without the unnecessary jargon that normally accompanies interest rate discussions. Basically, and in the simplest way possible of explaining this, whenever you see interest rates shoot up like that it is basically a message from the market on the economic and financial health of an economy. Basically, the market is saying it is t!ts up. It is basically supply and demand, in this case demand drying up so bad that the only way people may (and 'may' is the key word) be interested is if the interest rates are VERY high.
It is like having two people come to you to borrow money - say a thousand Dollars. One is a multi-millionaire who just happened to be short on cash for the weekend (i.e. very low risk of default and you are basically assured of getting your money back come Monday), and the second is that crazy guy who lives under the bridge who has horrid credit, has a bad drug habit, lies worse than a Thai hooker, and owes the local mob boss money. That chap comes to you and also wants to borrow money on Friday for the weekend (also claiming some emergency), promising to pay you on Monday too.
Now, both of them need $1,000, but one is a multi-millionaire who you know is wearing shoes worth more than the amount of cash he is asking for. The other is a chap who, to be honest, is not just a bad credit risk but an impossible one (because even if he wanted to pay he still wouldn't be able to ...the mob boss would get it before you did). Now, you can basically give the money to the rich guy and have him pay you back with a couple Dollars on top. However, for you to give the money to the crazy hobo he would have to offer you some C-R-A-Z-Y rate of return for you to even consider it, and even then you would probably say no. Maybe if he told you he has a house worth $300,000 that was gifted to him in a will last week, and if you loan him the money he will sign you the house (on the spot, upfront, ofcourse) and if he doesn't pay you the money on Monday you get to keep the house. That is, you give him $1,000, he signs the documents there and then, and if he doesn't pay you by close-of-business Monday you get to keep a $300,000 house! That may be the ONLY way you would lend him money.
Basically Greece is the crazy hobo down the street. Things are so bad, and the overhang of supply to demand so high (i.e. little supply), that the only way they can borrow $1,000 bucks is by giving the keys to a $300,000 house. Or, in real terms, giving a one year bond at 1,000%.
I hope that makes sense, and if I made it too simple apologies. But basically, this is the equivalent of a leper saying that if you give her a french kiss for 5 minutes she will give you money. For you to consider that 'offer,' if you decide to consider it at all, the money being offered will probably be quite the amount (and then you run to the hospital and ask for the godmother of all injections). Basically Greece is the leper woman sitting at the kissing booth, and the bonds' interest rate is the money being offered. Unfortunately I doubt many people will take them up.