Perpetual Bonds: An Economically Viable Solution To The Big Fat Greek Debt Crisis?

Even though the last time economists heard of it was probably in their history courses back in college, are perpetual bonds an economically viable solution to the current Greek debt crisis? 

By: Ringo Bones 

When the “radical left-wing” SYRIZA Party won a majority of seats during the January 25, 2015 Greek Legislative Election, the European Union powers-that-be at Brussels got scared given that SYRIZA’s party leader Alexis Tsipras was a well-known left-leaning politician running on an anti austerity platform that got him elected with an overwhelming majority. Several days after the January 26 swearing in of Tsipras as the new Greek Prime Minister, fears of a “Greek Eurozone Exit” died down after the new Greek prime minister decided to cooperate with the EU to pay its debts but in a manner that would lessen the current austerity measures imposed on the country by Brussels, could perpetual bonds provide an economically viable – and a less austere option for Greece to pay off its debts? 

Perpetual bonds are a kind of bond with no maturity date therefore it may be treated as equity, not as debt. Perpetual bonds are not redeemable but pay a steady stream of interest forever. Some of the only notable perpetual bonds in existence are those that were issued by the British Treasury to pay off smaller issues used to finance the Napoleonic Wars back in 1814 – hence the college history class connection of when might current tenured economist had last heard of such bonds. Some top economists in the United States believe that it would be more efficient for the government to issue perpetual bonds, which may help it avoid the refinancing costs associated with bond issues that have maturity dates. A perpetual bond is also known as “consol”, “perpetual” or just “perp”. 

Since perpetual bond payments are similar to stock dividend payments – as they both offer some sort of return for an indefinite period of time – it is logical that they would be priced the same way. The price of a perpetual bond is therefore the fixed interest payment, or coupon amount, divided by some discount rate, which represents the speed at which money loses value over time – partly due to inflation. The discount rate denominator reduces the real value of the nominally fixed coupon amounts over time eventually making this value equal to zero. As such perpetual bonds, even though they pay interest forever, can be assigned a finite value, which in turn represents their price. In exchange for the loans, the issuer agrees to make interest payments to the bond buyer for a specific time period. 

A variety of risks are associated with perpetual bonds. Perhaps the most notable is that a perpetual period is a long time to carry on credit risks. As time passes, bond issuers, including both governments and corporations, can get into financial trouble and even fail. Perpetual bonds may also be subject to “call risk”, which means that the issuer can recall them. 

The Big Fat Greek Debt Crisis: An Epic Financial Saga?

Even though the country’s sovereign debt problems only started to threaten the stability of the euro in 2010, is the sovereign debt crisis that affected Greece long in the making?


By: Ringo Bones


It can only be described as somewhat shocking news to anyone with a vested interest to the monolithic European super-currency – not to mention countless Greeks with nary a financial safety net – but the sovereign debt crisis affecting Greece which recently became newsworthy seems to have started as far back as 2001. It had been revealed to the mainstream financial news providers in February 19, 2010 that Greece made a currency deal / currency swap with Goldman Sachs back in 2001 in order to cover-up the country’s budget deficit. Though perfectly legal under the EU rules back then, many financial experts had now blamed this move as the root of the big fat Greek sovereign debt crisis that now threatens the value and long-term stability of the euro. With this fiasco, could the role of banks in financial crises such as these put them under scrutiny once again?

The current Greek administration insists that the practice was above board. Even Prime Minister George Papandreou keeps reiterating that Greece needs financial aid – not financial bailout. Given I’m somewhat perplexed of this arcane financial maneuver I started asking the financial experts in our neighborhood. All of them say that the sheer complexity and rigmarole of such over the counter instruments deals – like a typical currency deal / currency swap can be a very effective way of covering up a typical budget deficit problems suffered by a typical country. Of countries and individual persons, it can also be a very effective credit rating booster in the short-term, akin to someone sporting a 2,000 US dollar Armani suit even though they earn less that 25,000 US dollars a year.

As a recently designated member of the PIIGS countries – i.e. the poorest performing economies in Europe as in Portugal, Ireland, Italy, Greece and Spain – Greece has been forced to take extremely draconian actions in order to pay its sovereign debt. Like a proposed pay-freeze on public sector workers that made many Greek government employees threatening to go on a strike. Such unpopular austerity measures will probably only anger your typical working-class Greek who view the “institutionalized corruption” - described by most working class Greeks as the "Octopus" - in some sectors of the government as the root cause of the sovereign debt crisis. Not to mention the unprovoked shooting of a young demonstrator by the Greek police is still fresh on everyone’s minds.

And if this goes on any longer, the longer will Greece improve their sovereign credit rating from near-junk status as the world’s leading credit rating agencies downgraded the country’s credit rating since the crisis came to light. Remember back in 2008 when many highly paid non-American entertainers doing their shows in the US insisted on being paid in euro since the US dollar’s value kept on plunging? Now it’s the almighty euro that’s in trouble.