Securities are the most important tools of the modern economy. Shares are issued by companies, providing an inflow of "fresh" funds. Government bonds are a kind of "shares" of countries.
History of government bonds
For a long time, bonds were a constant interest rate instrument. Securities gave, say, 10% of annual income - as was the case in the UK of the Victorian era (XIX century).
There were also government bonds in the USSR. They brought a low income, but valuable prizes were raffled off by their numbers - travel vouchers, cars and even apartments. For many Soviet people, buying bonds was a rare opportunity to experience a sense of excitement - on a par with the Sportloto lottery.
Credit rating
There are financial rating agencies that assess the solvency of enterprises and entire countries. However, even they have miscalculations. Thus, the largest rating agencies Moody and Parliament Rate did not recognize the approach of the impending global crisis in 2008, associated, in turn, with speculation in the bond market.
In the course of the European crisis, changes were made to the classification of "problem" bonds in Greece, Spain and Iceland. These countries have large-scale indebtedness - about 150% of GDP. Simply put, they have issued too many unsecured bonds.
Government bonds are classified by their credit rating. The most reliable bonds are rated AAA, the less reliable ones are AA +, BBB. Bonds with a credit rating less than BBB- are considered “speculative”.
Bond market
The theory of the "efficient market", which has long amused the minds of many generations of traders, fails during crisis situations that had no analogues in the past - "black swans". According to this theory, each financial instrument is valued at its true value based on the information available on the market.
In order for government bonds to depreciate, the state must declare bankruptcy - a default. In ordinary life, the bankruptcy of an entire state seems to be an unlikely event. In practice, anything can happen in a matter of hours. The exchange rate may decrease several times due to unfavorable political events or sanctions of the international community. Capital outflows from this will reduce the state "bins" to the limit. Lenders will present the bonds to be exchanged for cash. The state will not have the money to buy its own securities - at the same moment it will have to declare a default.
One of the largest state bankruptcies in history was the 1998 default in Russia. The erroneous course of holding the national currency, coupled with unreasonably high interest rates on short-term bonds (140% per annum), led to the fact that Russian bonds became an analogue of the “financial pyramid”: interest was paid to holders from loans of new buyers.
Charity and patriotism
At different times, residents of countries experiencing difficult times bought government loan bonds for charitable reasons. For example, Nobel Prize laureate in physics Maria Skladovskaya-Curie bought unreliable French bonds in order to help the French military. After the war, these bonds depreciated. Of course, first of all, bonds are a financial instrument, not a means of charity. However, confidence in the country can be expressed in the amount of government bonds.
