government bonds: special increased / reduced risks

Government Bonds in the Financial Crisis Government bonds can be the best way to benefit from a financial crisis. This is true when the bonds are bound to a relatively stable currency or to gold, or otherwise do not loose their value due to typical currency devaluation risks during a financial crisis.

Major aspects

Types of government bonds

A government bond is a bond issued by a national government denominated in the country's own currency.

Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.

Of special interest are bonds with a value linked to a certain volume of gold.

Eternal debt...

It is a rule of the financial markets that public debt is never wiped out, excepted by expressive agreements among governments.

It is easy for governments to do this for loans among governments (nations) or state-owned institutions. They are doing it by loosing taxpayers money, not their own money...

On the other hand, governments can not wipe out by law their own obligation from bonds owned by private foreign persons.

The "eternal" validity status of such private-owned bonds is completely within legal logics. Governments can wipe out their own debt at any time, as they have the power of legislation. So this action might - within limits - wipe out debt inside the country, where citizens can take part in political life and can contest these measures. For foreigners, active participation in inner affairs of a country is prohibited.

Therefore it is quite logical that laws of debt cancellation within the national legislation of a country are not valid for external ("international") governmental debt.

Russian bonds

The best still unresolved example: Bonds by the Russian Empire

These bonds financed approximately 1910 and in the preceding years Russian railway infrastructure and industrialisation. They defaulted due to communist revolution. Communist Russia denied the identity of new Russia and the former Russian Empire, or otherwise denied the legal obligation to pay. This added significantly to the long lasting difficulties for communist Russia to find financial resources for industrialisation, excepted during World War II.

Russia benefits since approximately 1910 and until now from this huge investment. The railway net is a significant factor in Russian economy, also nowadays. So Russia permanently cashs in the return of investment instead of paying it to the investors.

Since approximately 1990, Russia tried to settle the problem.

French investors had been the major source for financing the Russian Empire. Hundred thousands of French citizens had bought these bonds. French govenrment had apparently done its best to have a good relationship to Russia. So French governmental responsibility has to be considered as involved, too.

Approximately 1995, In cooperation between Russian and French governments, a circular agreement was tried to eliminate all defaulted bonds without requiring cash from Russia. France used gold stocks - property of the Russian Empire, stored since its end for 80 years in France - to install a compensation scheme for the bonds: The current bond owners had to supply the bond documents first to a French organization, in order to get then a initially still unknown small amount of might be 5 percent of the true value (when measuring the true value in real terms).

A huge volume of such bonds had not been supplied into this compensation scheme. French citizens have since generations the habit not to trust excessively into their government and in general in governments.... So the problem persists for Russia.

A large volume of these bonds is based on gold value. 1 single bond might this way now be worth 3000 Euro or even more. This might be 30 times the value which could have been obtained by the compensation scheme. There are so many bonds still in private ownership that there is no easy rapid way out of this problem.

Russian Ship is targeted worldwide by creditors

Ships owned by national organizations and businesses are a preferred target of creditors of unpaid debt. Courts of any country could order that the ship is not allowed to leave untit the final Court decision. So even in case of lacking success of the Court proceedings, the damage would be significant. - Example:

The STS Sedov (Russian: Седов), formerly the Magdalene Vinnen II (1921–1936) and the Kommodore Johnsen (–1948), is a 4-masted steel barque that for almost 80 years was the largest traditional sailing ship in operation. After WWII, it came into the hands of Russia (war reparations).

Sedov has regularly been targeted by unpaid creditors of the Russian Federation such as Nissim Gaon (of now defunct Swiss group NOGA, an anagram of Gaon) and also by French holders of defaulted Russian bonds; in 2002 Sedov was forced to precipititiously and unexpectedly leave Marseilles in the dead of night to avoid being served a writ by AFPER (French association of holders of Russian Empire bonds) the following morning.

For over a year French holders of defaulted Russian bonds have been warning they were going to reorganise and export their claim to Anglo- Saxon jurisdictions, more friendly to private citizens than the French.

In May 2008, in the wake of British-Russian tension, Sedov was instructed by Moscow not to dock as planned at Southend on Sea.

(The preceding lines are mostly derived from Information of wikipedia.org.)

Consequences

Buy during a financial crisis government bonds if nearly worthless, when the long term expectations are fine.

The example of the defaulted Russian bonds shows the essential aspects to observe.

The contractual aspects like currency, guaranty, payment rules have to be studied.

It is well possible to guess the future: The political and financial discipline of a country is a relatively constant behaviour model. There are countries with one-time problems during decades, and other countries which developed the habit to experiment a financial crash every 10 years or so.

The demographic status of a country is a helpful indicator. It population growth is high, economic growth might be satisfactory, but financial stability may lack in many such countries for several decades from now.

Calculation and risk factors

Low risk because the government can raise taxes or simply print more money to redeem the bond at maturity.

If bonds are denominated in one of the current two most reliable currencies - US dollars or Euros - , they have a high protection against the currency risk.

There is always a currency exchange rate risk for investors acting in two different currencies.

There is in all currency-linked government bonds the inflation risk: 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 should protect investors against inflation risk. The problem is that price index statistics are basically wrong, at least due to basic logical statistical problems, in addition possibly to intentional falsification. It is different for long term comparisons to make the difference between these two. This makes that even inflation-indexed bonds yield a loss.

The best loss protection is if the bonds are bound to some raw material basket or even better to a mixed basked of raw materials, consumption, investment goods like housing, average income. You will never find the really ideal bonds...

Close to best is if the bond value is linked to the gold price. This is the case for a part of bonds from the Russian Empire.

France : some gold-linked bonds

Please contact...

The author's good information state on this matter has some good reason...

There are many defaulted gold-based Russian bonds owned by French families. Suggestions (French, English, German, Spanish, Russian) to: ok @ mrmio.com

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