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Bond investors have the ability to validate a country's solvency by accepting to buy its bonds. This is why the European Central Bank is barred by treaty from lending directly to European government entities, but it is allowed to buy European government debt securities from private bond investors.
Note how market discipline also ensures that corporate bonds don't need such independent validation, as the European Central Bank is not barred by treaty from buying corporate bonds at issue.
By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
The NYT had a very nice series on the defunct US mattress manufacturing company Simmons which finally collapsed after a private capital concern purchased the firm, using the firms own debt, and then paid itself a huge fee with more debt, and then declared bankruptcy. The bond market, with its usual good sense, ate those bond issues up, as if they were delicious.
The 'Greater Fool' Theory in action.
She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
For example, the California public workers pension fund just threw away $500M by participating in an insanely leveraged scheme to empty one of Manhattan's last middle class housing complexes and turn it into luxury housing.
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