Not all investment grade debt is created equal...
THE HEADLINES are full right now of stories about debt downgrades and sovereign-debt defaults, writes Martin Hutchinson, contributing editor to Money Morning.
And it's no longer just Europe that we have to be worried about. On Friday, Standard and Poor's warned that there was a 50-50 chance that the United States would lose its AAA debt rating in the next 90 days – even if the debt ceiling didn't result in a US default.
When you get right down to it, we're all asking the same urgent question: Just where the hell can I go for a really safe investment?
Fortunately, I have an answer for you.
S&P put us on notice back in April, when the ratings agency affirmed the country's AAA/A-1+ sovereign credit ratings – but also cut its outlook on the United States' long-term debt rating from "stable" to "negative."
The last time that happened to the United States was 70 years ago – right after the attack on Pearl Harbor. What S&P is talking about now, though, is a reduction of the country's actual credit rating.
For years, investors throughout the world have viewed US government debt as the "safe haven" of last resort. With a cut in the country's credit rating, those days would be over.
If you're searching for alternatives to US debt, the good news is that Standard & Poor's has granted 18 other countries that top AAA credit rating. The bad news is that the selection isn't as luxuriant as it first appears.
It's important to separate the prospects from the suspects.
For example, S&P granted the Isle of Man that top AAA rating. Unlike many folks, I have actually been to the Isle of Man – my first wife won a weekend vacation there in a magazine promotion.
Although it's a lovely spot and affords wildlife watchers lots of interesting opportunities, I can report that the cold, rain-swept resort has very little economy – other than a casino full of Liverpool grannies with accents incomprehensible to an outsider.
Casinos are supposed to be highly lucrative, but when you think of the Isle of Man casino, don't think of Macao or Las Vegas. Picture instead the lonely Indian reservation casino in remote Salamanca, NY – host to the occasional half-empty tour bus from Pittsburgh.
The Isle of Man has a population of 80,000 – which is much larger than I would have guessed. It also has the world's oldest continuously existing parliament, the Tynwald – which was established way back in 979 AD.
But I still don't think that I'd buy its bonds.
Given the lesson we've learned from our close look at the Isle of Man, I think it's worth taking a quick sovereign-debt safari. This is one trip around the world that won't cost you a dime. Indeed, in an era of spiraling fears about sovereign-debt defaults, it should actually bolster your bottom line.
Let's take a spin through the list of Standard & Poor's AAA-rated countries – in alphabetical order:
- Australia and Austria have little in common other than their AAA debt ratings. Of the two, I'd trust Australia rather more because of its mineral wealth. However, it has quite high debt and a tendency towards populist governments. Austria has a huge welfare state and a somewhat-shaky economy that's dependent on financial services. I don't see either going bust, but neither would be my first choice.
- Canada is a pretty solid outfit in my view, and one of the world's safest economies. The fact that Canada got itself into trouble in the early 1990s has proved to be a blessing; it has reduced government spending since then – to the point that, overall, it's slightly lower than in the United States. I'll grant you that Canada has a reputation for being boring. But as you know, for bond investors, boring is good!
- Denmark and Finland would be pretty solid if they were standing on their own. Unfortunately, they are part of the Euro community, which means they could get sucked into appallingly expensive bailout schemes. And unlike their German compatriot, Denmark and Finland aren't big enough to say "no."
- France is struggling with big budget deficits. Although there's no "F" in PIIGS (the acronym of dodgy southern European economies consisting of Portugal, Ireland, Italy, Greece and Spain), there probably ought to be.
- Germany is the single-most solid economy in the European Union (EU), and boasts a large export surplus. On its own, Germany is a slam-dunk AAA economy. Even as a Euro member, it seems unlikely the EU can do anything too ruinous without Germany signing on, because it would have to pay most of the cost. In my bottom-line view, that means Germany's top-tier credit rating is likely to remain solid.
- Guernsey is an offshore British island and popular tax haven. Its population only totals 66,000, but it has a good offshore-banking business. And being further south, Guernsey also features better weather than its Isle of Man counterpart.
- Hong Kong currently faces a situation in which its government spending is rising faster than gross domestic product (GDP). As it is now part of China, I would also have to say that it now faces a fairly substantial political risk.
- Liechtenstein and Luxembourg have vastly different outlooks. Of the two, Liechtenstein's the one you want, due to its hereditary Hapsburg monarchy, flourishing tax-haven banking industry and truly lovely Alpine scenery. Unfortunately, its population at 35,000 is even smaller than that of Guernsey. Luxembourg is an EU banking center that has the misfortune to be technically the EU's richest country. Suckers!
- The Netherlands offers investors pretty much the same mix of advantages and disadvantages as Denmark and Finland except that it isn't Scandinavian. Expect, therefore, a substantial EU/Eurozone discount.
- Norway isn't an EU member, so nobody can make it bail out Greece. Now you're talking! Plus, it's a major oil exporter, with a huge ($570 billion), well-managed sovereign wealth fund.
- Singapore is the country I would regard as the most solid economy of the S&P AAA-credit-rating club, chiefly because it has a more diverse economy than Norway. Singapore is beautifully run, and one of the least-corrupt countries in the world.
- Sweden, unlike its Norway counterpart, doesn't have much oil and has no trust. It also has a heavy social welfare system and an expensive government. On the plus side, it had the sense to stay out of the Euro.
- Switzerland is basically a Norway – but with banks instead of oil. It, too, looks rock solid.
- The United Kingdom is no longer an empire, and has no money these days. There's not much industry left, which leaves it very heavily dependent on a bunch of dodgy hedge funds in the City of London. Unlike the United States, the United Kingdom has made at least some attempt to get its public spending under control. And while I would say it's pretty likely to follow its US counterpart into a credit-rating downgrade, if I were S&P, I'd downgrade France before either of these two.
So there you have it. As I warned, there's not all that much to choose from.
As you assemble your safe-haven investments, keep in mind a couple of Asian countries that aren't AAA-rated, but also aren't overly indebted. And they're run by grownups. I'm talking about Taiwan (AA-minus) and South Korea (A).
At a juncture in which sovereign-debt defaults are a very real possibility, it's clear bond safety isn't what it used to be.
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