What Were Greek Bondholders Being Paid For?

I agree with Felix Salmon that we should still fear Greek default--if not now, then eventually.  (I also agree with Henry Farrell that if the eurozone does pull this one out, it will have substantially deepened its ties and economic institutions. Or at least this is what I take him to be saying.)

But I don't understand this line in Felix's post:

More generally, financial markets are good at taking the collapse of risky assets in their stride: what they're bad at is dealing with the collapse of assets they thought were safe. And until very recently, Greek bonds were considered to be an interest-rate play, not a credit play. As a result, the institutions owning them can ill afford to see big losses on them.

There's no currency risk on Greek bonds. And because they're issued in a major currency, I don't see liquidity being a major independent issue.  Unless I'm missing something, that leaves duration, and default risk.  Assuming that the Greeks hadn't managed to produce some wacky duration mix, the "interest rate play" was a credit play.   The fact that these institutions failed to correctly price the credit risk is perhaps understandable, but if they thought they were doing something other than taking on credit risk, it seems to me that they were borderline insane.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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