Government bond

(GILT)

Serious Information

List of nations to have defaulted

Trivia

A government bond is a bond issued by a national government denominated in the country's currency. Bonds issued by national governments in foreign currencies are referred to as sovereign bonds. A sovereign bond (government bond) is a bond issued by a national government as opposed to a municipal bond which is issued by a sub-division of a government. The risk of sovereign bonds varies widely with some bonds such as USA treasury bonds being considered among the safest investments known and others, such as the bonds of many developing nations, are considered highly speculative. The safety is dependent on whether the nation is considered likely to deafult on the debt.
During the early 1980s, sovereign bonds were a popular investment for Western banks. These created many problems when nations found it difficult to repay those bonds.

Inflation can help reduce the value of a government debt so helping to reduce the risk of default. A big movement in the price of government bonds can cause problems for pension funds.

Sovereign bonds present unique issues. Unlike a corporation or even a municipal subdivision, a nation cannot file for bankruptcy. Hence situations when a nation defaults can be extremely complicated. Common practice has been for government is to present an exchange offer to its bond holders in an effort to restructure the sovereign debt, as has been the case in Peru (1996) and Argentina (2001). However, getting the bond holders to accept an exchange offer is very difficult.

A UK government bond, also known as a gilt (pronounced the same as the word guilt), carries less risk than that of a corporate bond as it is guaranteed by the government which is unlikely to go bust.

Government bonds are usually referred to as risk free bonds, because the government can raise taxes or simply print more money to redeem the bond at maturity. Some counterexamples do exist where a government has defaulted on its domestic currency debt, such as Russia in 1998, though this is very rare.

In the US, Treasury securities are denominated in US dollars and are the safest US dollar investments. In this instance, the term risk free means free of credit risk. However, other risks still exist: such as currency risk for foreign investors. There is inflation risk - in that the principal repaid at maturity will have less purchasing power than anticipated if the inflation outturn is higher than expected. Many governments issue inflation-indexed bonds, which protect investors against inflation risk.

An example of somewhat risky bonds issued by a government can be given with countries that have less than perfect capabilities of conducting financial policies. Such an example is Bulgaria due to its being dependent on the world economy and economic institutions much more than, say, the US. Some of this country's bonds were only given an A - scale rating after 2004. As of February 2006 Standard & Poor's rates Bulgaria's long - term debt denominated in domestic currency at BBB+. And this rating is the result of almost a decade of constantly decreasing risk (and increasing ratings). We should also note that this country's short-term debt is in fact currently rated A.

Why do countries default?

Sovereigns default because they can’t meet their contractual obligations or because they don’t want to meet their contractual obligations. Amongst those debtors that can’t pay their obligations are (1) those that can’t pay now
and (2) those that can’t pay over any reasonable time period. Understanding sovereign debt defaults is complex, and issues of liquidity, solvency, and unwillingness to pay need
to be addressed when evaluating the incentive for sovereigns to default.

A list of some Nations to have defaulted on debt (reference 1)

The largest incidence since 1824 of defaults by nations, however, occurred in the 1930s, following the lending boom of the 1920s.

Since 1824 the UK, India, Korea, Malaysia, Singapore, and Thailand Australia, Canada, New Zealand, Norway, United States have never defaulted on a debt.

France 1558, 1624, 1648, 1661, 1701, 1715,
1770, 1788

In 2002 there was wide rumouring that the USA could default on their debt.
The Treasury Department website was openly stating that as of January 24, 2006 the national debt stood at $8,185.3 billion and on January 26th at $8,190.5 billion. Yet the US national debt ‘ceiling’, the maximum amount of debt the US government may hold at any one time, stands at $8,184 billion – a full $5.5 billion less. So the US government was operating in technical default.

Mexico defaulted in the early 1980s,

Spain defaulted on its external debt thirteen times between 1500 and 1900. (Perhaps they should stop using the phrase welsh, on a bet to Spanish on a debt) 1557, 1575, 1596, 7 1820, 1831, 1834, 1607, 1627, 1647 1851, 1867, 1872, 1882

Germany 1683 5 1807, 1812, 1813, 1814, 1850

Holland 1814
Russia 1839, 1998 When Russia defaulted on debt 1998 this caused mayhem for a popular stock exchange formula LTCM.

Bulgaria 1886, 1891

Greece 1826, 1843, 1860, 1893
Austria1802, 1805, 1811, 1816, 1868

Number of occasions developing nations have defaulted since 1824

Argentina 4 (Argentina's made a default of $93 billion in 2002)
Brazil 7
Chile 3
Colombia 7
Egypt 2
Mexico 8
Philippines 1
Turkey 6
Venezuela 9

Default can become a way of life. Over the period from 1824 to 1999, the debts of Brazil and
Argentina were either in default or undergoing restructuring a quarter of the time, those of Venezuela and Colombia almost 40 percent of the time, and that of Mexico for almost half of all the years since its independence.

It has been postulated that a country’s current level of debt intolerance can be approximated empirically as the ratio of the long-term average of its external debt (scaled by GNP or exports) to an index of default risk.

Third World debt is external debt incurred by Third World countries (the term "Third World" is still in use, although many prefer less pejorative terms, such as "developing countries", "Majority World" or "global South"). Unpayable debt is a term used to describe external debt where the interest on the debt exceeds the amount that the country produces, thus preventing the debt ever being paid back. It is considered by some a method of oppression or control by first world countries; a form of debt bondage on the scale of nations. Mnay poorer nations are forced into debt they cannot afford to pay off, and forced to default.

Types of bond issued in each nation

France
Issued By: Agence France Trésor, the French Debt Agency
BTFs - bills
BTANs - 1 to 6 year notes
Obligations assimilables du Trésor (OATs) -
TEC10 OATs - floating rate bonds indexed on constant 10year maturity OAT yields
OATi - French inflation-indexed bonds
OAT€i - Eurozone inflation-indexed bonds

Japan
Issued By: Ministry of Finance (MoF)

Japanese Government Bonds (JGBs)
Revenue Bonds/Straight Bonds
Financing Bills
Subsidy Bonds
Subscription Bonds
Contribution Bonds
Demand Bonds (kofu kokusai)

Germany
Issued By: Finanzagentur GmbH, the German Finance Agency

Bunds
Bubill - bills
Bundesschatzanweisungen - 2 year notes
Bundesobligationen- 5 year notes
Bundesanleihen (Bunds) - bonds
Finanzagentur GmbH

Italy
Italy
Issued By: Dipartimento del Tesoro

BTPs
Buoni Ordinari del Tesoro (BOTs) - bills up to 1 year
Certificati del Tesoro Zero Coupon (CTZ) - bills up to 2 year
Buoni del Tesoro Polianuali (BTPs) - bonds
Certificati di Credito del Tesoro (CCTs) - floating rate notes
BTP Indicizzato all'Inflazione - inflation linked bonds
Dipartimento del Tesoro

United Kingdom
Issued By: UK Debt Management Office

Gilts
Conventional Gilts
Index-linked Gilts
Double-Dated Gilts
Undated Gilts
Gilt Strips
UK Debt Management Office

United States
Issued By Bureau of the Public Debt

US Treasuries
Treasury bill
Treasury note
Treasury bond
TIPS
Savings bond

Canada
Issued By:

Canada Bond - fixed rate
Real Return Bond (RRB) - inflation-indexed
Canada Savings Bond (CSB)

Trivia

Recentely the British government advertised in the daily telegraph business section for a gilt that will start in 2006, and be paid back in 2046.

A USA government bond commercial once used the cast of "The Brady Bunch".

Often anicient bond certificates can be collector items. For instance Beautifully engraved Certificate from the Imperial Russian Government issued in 1906. This historic document has an ornate border around it with a vignette of the Russian Coat of Arms. This item is hand signed and is over 96 years old was being sold on the internet for aprox £35 - £70.

Fully half of all
defaults or restructurings since 1970 took place in countries with ratios of
external debt to GNP below 60 percent.

Links on websites on subject

http://www.utdt.edu/~fsturzen/chuhanfinal.pdf DEFAULT EPISODES IN THE 1980s AND 1990s: WHAT HAVE WE
LEARNED?

http://post.economics.harvard.edu/faculty/rogoff/papers/BPEA2003.pdf Paper on debt Intolerance of nations (reference 1)

http://www.cityequities.com/
http://www.moneyweek.com

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