Start the conversation
Comment on This Story
Or to contact Money Morning Customer Service, click here.
Stories about debt downgrades and sovereign-debt defaults are dominating the headlines.
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 U.S. 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.
The Sovereign-Debt-Default Survival Guide
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 U.S. 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 U.S. 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.
A Global Sovereign-Debt Excursion
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, if you include state debt, Australia's debt level is rather high. And it also has 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 - something we've told all of you Money Morning readers on several previous occasions. 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 are Nordic neighbors with divergent outlooks. Denmark was wise enough to avoid euro-community membership. Finland was not, meaning it could get sucked into appallingly expensive bailout schemes. And unlike its German compatriot, Finland isn’t big enough to say "no." The bottom line: Denmark is more solid than Finland, and is very similar to Sweden, which we’ll look at momentarily.
- 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. If you can find any Kingdom of Norway debt, buy it!
- 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. In short: It's rock solid.
- 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, is 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 U.S. 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 - although the choice selections (Canada, Norway, Switzerland and Singapore) all look pretty solid.
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.
Stocks are too volatile, dependable high dividend yields are as rare as hen's teeth, and U.S. Treasury yields are anemic (not to mention the associated growing risk of a cut in the U.S. credit rating).
Most investors are watching as the threat of sovereign debt defaults around the world gut their portfolios. Others have retreated to the sidelines.
But Money Morning's Martin Hutchinson has developed a strategy that combines safety and profits - and that will enable you turn these "negatives" to your advantage. Click here to learn how you, too, can use these techniques to build a lifetime of wealth, safety and security.]
News and Related Story Links:
- The Permanent Wealth Investor:
Official Website. - Reuters:
S&P warns of downgrade if no debt deal reached. - The Guardian:
Wall Street shares slump as S&P downgrades US debt outlook. - Money Morning:
Canada: Investing in the World's Safest Economy Can Put Profits in Your Pocket. - Wikipedia:
The Isle of Man. - The BBC:
The Isle of Man - an Island Oasis. - Money Morning:
The New Global Gambling Hotspot That's Set to Overtake Las Vegas. - International Business Times:
You Are Not Mistaken: The Pittsburgh Pirates are in First Place. - Money Morning:
Investing in Germany: The Closed-End Fund to Buy Now. - Wikipedia:
Guernsey. - Investopedia:
Gross Domestic Product (GDP). - Wikipedia:
Scandinavia. - The Financial Times:
Norway's Sovereign Wealth Fund Optimistic on Europe. - Wikipedia:
Norway.
Surprised by your comment re Australia's "quite high debt" – according to IMF it stands at 21.9% of GDP, considerably lower than that of Canada and way below that of the US
I wish to correct a few mistakes in your list of AAA rated countries. Neither Denmark nor Sweden has adapted the Euro so these countries are less likely to be weighed down by any bailouts in the Euro club.
Technical point – Denmark is not a member of the euro-zone. It retains the Danish krone. With a sovereign debt of slightly more than 40% and a large positive balance of trade, it is in good shape.
Yes, as an EU member it may well have to contribute to solving the Greek debacle but then, so will the US. After all, the US is the largest contributor to the IMF
I like your new format with the social media links as well as the uncluttered layout. Of course, the information is timely and useful. Thanks!
You are almost right in your description of Australia but what you didn't mention is the present governments latest idea to rid itself of the debt they incurred following the GFC.
This idea is the "carbon tax " and is based on the theory that the world is warming thanks to human activity.
They say that if they raise the cost of commodities ,they will raise the cost of goods thus reducing consumption of goods because the population of Australia will not be able to afford fuel ,electricity and Food . This is supposed to save the planet.
i know it sounds crazy but it's the labor government (in coalition with the greens party and three independent members of parliament ) policy and it is they who are going to force this on Australia in July next year.
Sure,we earn a great deal in Some sectors of the economy ,notably mining ,but that is less than 1% of the working population. The rest make do on a lower level income.
When labor came into office in 2007 Australia had 20 billion in Cash . Not bad for a population of 22,000,000.
Within months,labor had blown the lot with crazy things like a cheque for $900 to every wage earner in Australia .
As result of this profligate activity ,labor are borrowing 100,000,000 per day ,every day from China to keep the economy running and this Carbon Tax is the only method they can think of to extract money from the populace to keep the country afloat.
So,if you are intending to invest in Australia,study us closely …very Closely.
7/19/2011
Very in-debt, analytical, yet concise synopsis of the world's various economies and where they are headed.
If the United States would like to improve its current "state of financial crises" it could make a start in reversing the 'polar opposite" behavior which took her here. Go back to the "fundamentals of building America": BUY AMERICAN, BUILD/MANUFACTURE AMERICAN/TAKE CARE OF ITS VERY OWN U.S. CITIZENS. DEVELOP AND EXPAND THE GROSS NATIONAL/DOMESTIC PRODUCT; EMPLOY AMERICAN AND STOP TRANSFERRING ITS OPERATIONS OVERSEAS AND CONTINUE WITHAT WHICH BROUGHT AMERICA TO SUCCESS IN THE INDUSTRIAL REVOLUTION IN THE LATE 19TH CENTURY.
THE USA NEEDS TO CONSIDER VERY WISEY WHAT CONFLICTS IT WISHES TO ENGAGE BEFORE 'RISKING ITS OWN CITIZENS LIVES OVERSEES.
ACKNOWLEDGE AND SUPPORT OUR 'TRUE, LOYAL ALLIES", NAMELY, CANADA, ISRAEL, ENGLAND AND THERE MAYBE OTHERS.
FINALLY, USA NEEDS TO LEARN FROM ITS MISTAKES AND THE MISTAKES OF OTHER COUYNTRIES AND BE SUPER-CAREFUL NOT TO FOLLOW THE PATH THAT LEADS TO DEFEAT AND LOSS OF SELF-RESPECT.
IN OTHER WORDS, 'I AM PROUD TO BE AN AMERICAN"!
SINCERELY,
LARRY KALB, M.A.
BRICK, NEW JERSEY
Hi,
I liked your article, but however i would like to know where India Stands, When we take a name of few countries with high growth rate. China and India Stands out.
Unlike, other countries India is Not dependent On exports, Infact its major contribution is due to inclusive consumption other then Crude Oil Rise, There is hardly any factor which would stop India from growing.
You are right on the mark. I take exception to Canada, but if the majority of Canadians have a good sense and keep siding with more conservative policies then Canada will be OK, too.
As far as boring is concerned, it is right up there amongst the winners.
Bets,
Dani Janes
Dear Sir,
I think that you must be getting your Australias and Austrias muddlesd up. The Australian Government has one of the lowest debts in the world. Indeed, until the GFC it had no net debt at all and right now its total debt is well under 10% of GDP. As for populist governments, Australia is no more liable to the election of such a government then any other democratic country in the world. One didn't see people marching in the streets when the Aussie government just extended the retirement age from 65 to 67 – indeed, there wasn't even a murmer of dissent.
You may have other reasons for disliking Australian risk but you do yourself little credit by ascribing reasons that are, quite simply, incorrect.
You should mention that Singapore has a sovereign wealth fund of more than USD400 billion tucked away for rainy days, and (fortunately? unfortunately?) a parliament dominated by a single party since independence in 1965. :D
Dear Sir,
You conclude;
"In my bottom-line view, that means Germany's top-tier credit rating is likely to remain solid."
And yet it is not in you selection of 4.
They seem to avoid leverage and have a fine work ethic and craftsmanship. And boy What Beer!! Yes I believe their rating is solid and will endure. Certainly should make the cut.
A shame you visited the Isle of Man during some bad weather! I must point out that it's main industry is similar to Jersey and Guernsey, finance! Yes the one casino can be described as a bit seedy and less Monte Carlo but it isn't the mainstay of the economy that you suggest.
Likewise manufacturing in Britain is at a high point with good industrial relations, particularly in the high value sectors.
Great comments, folks …
Martin’s comments about Australia seem to have raised a lot of hackles, so I phoned him early this afternoon to see if he could expand upon this a bit.
The key with Australia, he said, is that you have to also include state debt – which is soaring at an alarming rate. Borrowing by state governments is projected to rise from about $160 billion in 2010 to $243 billion in 2014 – a jump of 52% in just four years. Most of that money is earmarked for obsolete, decaying and overtaxed transportation, electricity and water-related infrastructure. That’s expected to have a hellacious impact on interest rates and on the amount of capital available for the private sector. And those figures don’t include debt at the national level.
Martin, too, appreciates and enjoys the comments. And because you all took the time to post your comments – and to contribute some solid thinking – he wanted to offer this response: “I stand by my view – Aussie state debt is relatively much higher than in the United States, for example. That puts the country in trouble in a resource-price downturn.”
He conceded that it made sense to add “including state debt” in his thumbnail analysis, and to say that the country’s debt level is only “fairly high.” But he noted that “my [overall] view doesn’t change.”
And those of you who pointed out the comment about Denmark were absolutely correct. We addressed that issue.
Lastly, on the issue of Germany, it’s an economy that Martin has written extensively about – and in quite a bullish manner. I think his main concern is the potential for a ripple-effect/financial fallout from the ongoing sovereign-debt concerns.
Thanks for the comments – keep them coming. This was one of our best-read analyses of the last week or so.
Respectfully yours;
William (Bill) Patalon III
Executive Editor
Money Morning
Great comments, folks …
Martin’s comments about Australia seem to have raised a lot of hackles, so I phoned him early this afternoon to see if he could expand upon this a bit.
The key with Australia, he said, is that you have to also include state debt – which is soaring at an alarming rate. Borrowing by state governments is projected to rise from about $160 billion in 2010 to $243 billion in 2014 – a jump of 52% in just four years. Most of that money is earmarked for obsolete, decaying and overtaxed transportation, electricity and water-related infrastructure. That’s expected to have a hellacious impact on interest rates and on the amount of capital available for the private sector. And those figures don’t include debt at the national level.
Martin, too, appreciates and enjoys the comments. And because you all took the time to post your comments – and to contribute some solid thinking – he wanted to offer this response: "I stand by my view – Aussie state debt is relatively much higher than in the United States, for example. That puts the country in trouble in a resource-price downturn."
He conceded that it made sense to add "including state debt" in his thumbnail analysis, and to say that the country’s debt level is only "fairly high.'" But he noted that "my [overall] view doesn’t change."
And those of you who pointed out the comment about Denmark were absolutely correct. We addressed that issue.
Lastly, on the issue of Germany, it’s an economy that Martin has written extensively about – and in quite a bullish manner. I think his main concern is the potential for a ripple-effect/financial fallout from the ongoing sovereign-debt concerns.
Thanks for the comments – keep them coming. This was one of our best-read analyses of the last week or so.
Respectfully yours;
William (Bill) Patalon III
Executive Editor
Money Morning
One should really consider Australia's $1.4 trillion of superannuation savings as a counter to it's personal debt level. If this was taken into consideration it brings Australia to the top part of the list. Even though I am not part of the "property doubles every 10 years crowd" I would also point out that a lot of the personal debt went into housing, which will always retain some value as a place to live. True, it may be worth half of what people have paid recently, but overall, it still puts Australia in a good "overall" position.
Martin,
Good analysis – on a much more trivial note – the Icelandic parliament, the Althing, was founded in 930 and is to the best of my knowledge the oldest still existing parliament. It met on the same site for almost a thousand years.
Now you would probably not buy Icelandic bonds, though they, amazingly , were also triple A not too long ago!
On the analysis, I believe one point is underdebated. Hitherto, the fact that the USD and the US treasury bonds were considered the "risk free" instrument which all financial theory is built on meant that there was some sense in terms of the volume of flows (i.e. the USD and the US economy was big enough to absorb all reserve flows). That is one of the problems of today's financial crisis. There is no "reserve" economy among the ones mentioned big enough to absord the reserve flows – undoubtedly the Chinese central bank chiefs would love to lessen their dependency on the USD, but where do they put the money? The CHF is almost at parity with the EUR, something which will suck the air out of the Swiss economy – anybody having been to Switzerland a few years ago and found the country expensive at an exchange rate of 1.60 to the EUR, will find it absurd now. Try travelling to Brazil – four years ago a EUR bought 4.15 reais, now the exchange rate is 2.20 – all but a few sector within export have totally shut down. A tourist going to Brazil will find it mindblowingly expensive – converted a the current exchange rate most stuff is more expensive than in Europe though local salaries are but a fraction. Married to a Brazilian for more than 25 years, I still fail to understand how the system stays intact.
On Europe I think the debate needs to center on the next big issue! If the euro is rescued, a much bigger underlying problem still persists. There is just no plausible way that the PIIGS are ever going to be competitive. Without their own currency, they can only improve their competitiveness by maintain their costs (mostly labour costs) below they countries they compete with (mainly France and Germany). Even under extreme austerity and suffering that would take 25 years of adjustment and even so would probably not solve the problem. What they need is a devaluation and follow on economic and social policies that encourage investment in knowledge based industries – this is where they have badly failed. I always ask my self how on earth the world's center of excellence within solar energy is in Germany and Austria and not in Spain, Greece or Portugal!
If these countries are to survive economically, they will need to exit the euro, devalue their currencies, implement the proper policies and just work very hard to bring it all back on tract. After all, these were the countries partying in the initial golden days of the euro.
Best wishes to all
Cheers
mmmmmm……Why, I wonder has Germany not been recommended as one of "the top performers" ? Germany has 1st class companies,industrial relations`, not to mention the strongest/largest economy in the whole of Europe! This I know for sure; if there are any more Portugal's`/Greece/Eire, then the Germans` will give these nations` an ultimatum:- get your "own currency" or, we,(the Germans`), will return to the Deutsche Mark! It was, in my opinion, a mistake for the German Government to "exchange" a "World class " currency (DM), for the Euro. Oh well; "Happy Days"!!!!!!!!!!!!!!!!!!!!
VERY GOOD
Denmark and Finland aren't neighbours and Ireland isn't in southern Europe.
Martin, good reading and great information, I know it is asking a lot, but please when you find out, can you let us know when the worlds next economic disaster is due?
Canada boring?
I'll take that any day over living in the "excitement filled" USA.
Here again, I read typical Yankee arrogance in various articles from Americans on their view of Canada…please…keep telling your fellow countrymen that Canada is "boring"…it's to our advantage to have them stay south of the 49th parallel, we don't want to get infected by whatever insanity virus it was that overtook our neighbours to the south and made you folks "so exciting"!
Dear William,
Recently JAPAN'S debt was downgraded by the rating agencies. I do not see any movement in their Interest Rates, LONG OR SHORT, so the downgrade had no effect at all. Can the same thing happen in the U.S.???
I wonder how the "safe-haven" countries will fair when hundreds of thousands of economic refugees get on the move. Most of the ones traveling to Canada will be armed to the teeth.
One only needs to understand the Venetian Bankers of 1345AD to see a possible outcome. To understand the future you only need look at the past.
To: LARRY KALB, M.A.
BRICK, NEW JERSEY
Mate; do not forgot Australia that has, uniquely, been there EVERY time international support was needed Australia`s actual record speaks volumes re her proven strength of friendship in backing America as her most stalwart ally & Brother-In-Arms whenever she truly needs reliable mates to back her.
EG:
Both World Wars,
Korea,
Vietnam,
Gulf Wars 1 & 2,
Iraq,
Afghanistan etc.
No other country can match Australia`s unparalleled record for consistent, steadfast support with America. When the chips are down, actions speak louder than words, indeed.
Here`s to the American/Australian alliance, a beautiful thing.
About Canada's "conservative policies", please note that these apply mainly to financial and banking regulations, which are much tighter than yours. Fiscal structure and social security are much more "liberal" than in the U.S. with higher tax brackets reaching 50%, a strong VAT tax, a guaranteed national pension fund, free health service for all (with pharmaceuticals-buying govt insurance), public automobile insurance, etc. And the prudent gradual reduction of deficit in the 90s was the work of a liberal center-left government, not of the conservatives, and was based on higher taxes as well as spending cuts. In fact, the current conservatives tried to give away the budget surplus that resulted by Bush-like tax cuts mostly in favor of higher incomes (of which I am one, BTW), but were prevented by a center and left-leaning opposition coalition… which is in large part why the country was in good shape to weather the recent economic crisis.
Also, it is interesting that your four top AAA countries all have good, if dissimilar, social security and free health services, far more extensive than American ones. It doesn't seem to hurt their economies one bit, does it?
What about New Zealand ?
Suggest you do some research into the financial services industry in the Isle of Man.
Boy, did you step in it. Looking at Germany, I'll bet you wish you hadn't wrote that now. As the EU's Largest Debtor, Germany's EU Leading 2011 Q4 Government Debt of over 7 Trillion Euros, cannot be forgiven this time. EUROSTAT had them at 2.088 Trillion Euros for 2011 Q3 Goverment Debt, and now 4 weeks ago, the truth came out about their 5 Trillion in "hidden Government Debt", bringing Germany to over 7 Trillion Euros in Government Debt. This equates to a Debt to GDP Ratio of 268%, or more than 4 times the allowed value of the Maastricht Treaty which sets a limit of 60% max. The new "financial enemy of the EU", Germany is clearly the trigger for the current EU Crisis. We in the industry have long despised Germany for their arrogant impunity and warped sense of "moral superiority", constantly bashing the US & UK for their financial operations. The worst part now, is Deitsche Bank.
Teetering on insolvency, and reeling from the ratings drop last week, are not helping them any. Deutsche Bank has lost 50% of their shareprice and 50% of their Market Cap since July. Leveraged at a shocking 49:1, a mere 3% drop in the asset values on their books will wipe them out in one of the most devastating bankruptcies in modern European history. We have supported an extreme short on them since July, any upswings lately, have been dead cats, case in point yesterday, I argued with a young trader in the morning, who later called me back to apologize after seeing the obvious drop. Deutsche Bank cannot raise the 9% Tier 1 Capital needed to meet the new requirements, that's why Josef Ackermann is gobbing off in the Press against it. ANY CEO of a Bank who is "claiming" to have 1.8 Trillion in assets, that can't raise 9% for Tier 1 Cap requirement, or hit a lousy 10 Billion Euro target for shareholders that he himself promised, should be removed from his position with immediate effect, full stop. Such an amateur display of incompetence is an insult to others in the industry, and only serves to fuel the ongoing protests we are seeing now. Transparency, is the key here. Oh, and note to German Bankers: IFRS is not a sexually transmitted disease, well, maybe the way you are using it, it is.