A Sovereign-Debt-Default Survival Kit: The Four Countries That Will Keep Their AAA Ratings
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 fromPittsburgh. 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.
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