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After searching for hours on Google I found these two great tables (theya are also sortable):

I read that these numbers show how probable is for a government to be able to repay its debt (this is important for the money in my wallet because it tells me how safe it is to invest my money in these countries buying their bonds).

Well, at sight it seems simple to read these numbers, one could say a country like Greece with a 165% Debt/GDP and a deficit of -9 is likely improbable that repays its debt (and infact we all know this is the main thing going on all newspapers now).

But then if you look a bit deeper you immediately see:

  • US (debt/gdp 93 | deficit -8.70)
  • Argentina (debt/gdp 47 | surplus 0.30)
  • Swiss (debt/gdp 55 | surplus 0.40)

So is it safer to buy Argentina's tango bonds rather than US treasury bonds? Is a Swiss bond as safe as an Argentina's one? [*]

How should I read these figures?

Here they say a 60% debt/gdp is considered a prudential limit for developed countries, but what about Singapore (debt/gdp 97), or Germany (debt/gdp 81)...

I thought the deficit/surplus was the key of the all thing, let's say you have big debt/gdp, but you have surplus than one could say yoiwill repay your debt using surplus and therefor the debt/gdp will slowly decrease, but look at Japan then: debt/gdp 211, deficit -9, will they ever repay their debt then?!

Can in some way countries with surplus (see Norway, Brazil, Quatar, Russia) be considered virtuosos, like a small family that always tries to spend less than what it earns? But Russia defaulted in 1998.


[*] It's not my intention to pick on any on the country listed, I just neede to list some to make examples.

  • i'd say "belongs on economics.stackexchange.com" but i hear that one is closing or something. – user296 May 21 '12 at 20:22
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    @fennec This is on-topic because it relates to investing in bonds. – Chris W. Rea May 21 '12 at 23:01
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While you have asked for general principles, I am going to seize onto a specific example you gave in order to illustrate the difficulties here: Argentina.

Argentina's bonds are probably not safer than US treasuries. Argentina is presently in the business of seizing foreign oil businesses (Repsol YPF) while championing leftist causes. At the very least this indicates an elevated level of political risk:

S&P, which affirmed Argentina's ratings five notches into junk territory at B, said policies such as those enacted since the country's October presidential election could also weaken Argentina's macroeconomic framework and external liquidity... "Actions of this type continue to shorten the economic planning horizon in the country and contribute to Argentina's deteriorating economic and political links with the international community."

-- "S&P Lowers Argentina Outlook To Negative". The Wall Street Journal, 23 April 2012

You're not going to be able to capture that sort of a risk with raw budget numbers. It's hard enough to figure out creditworthiness for a business; for an entire nation it's even harder. That's why credit-rating firms, as faulty as they may be, employ dozens of people to try and figure this sort of thing out.

Additionally, there is a currency risk associated with buying bonds denominated in foreign currencies. It doesn't matter much if $nation repays all its bonds if they have so much inflation that the repayment is worth half of what it used to be (nor is it much help if your own nation's currency rises in value while your investment's value is stable elsewhere).

Ultimately the value of a bond is "how much money am I actually going to get back?" and while operating a budget surplus isn't a bad sign in and of itself, it's hardly the complete picture.

A fair accounting of the relative creditworthiness of any two nations needs to unite two massive fields of study: Macroeconomics and Politics. It is possible that the right sort of degree in economics, risk management, or a similar field of study could prepare you to know exactly what sort of research is necessary to make a meaningful analysis. :)

Now, if you just want some commentary on which bonds are safe to buy, ask a credit-rating agency -- for example, read Standard and Poor's sovereign ratings - or find a mutual fund which may invest in international bonds at its own discretion and have someone else make the decisions.

  • Interesting point. I have to disagree only when you say "have someone else make the decisions", because I think at all poeple who bought Tango Bonds and Lehman Brothers bonds following the suggestions/decisions of someone else and the wrong rating provided by S&P and other agencies. – Marco Demaio May 22 '12 at 13:18
  • I should note that I don't necessarily endorse someone else make the decisions resulting in good decisions being made overall... just that it's an available option and may possibly result in better decisions than any alternative really available to a typical retail investor. – user296 May 22 '12 at 17:07
  • to whom it may interestaed I found another excllent exaplanation of why Govt. with low Debt/GDP ratios can not be considered safe place to invest your money (in bonds) on their own: frbsf.org/publications/economics/letter/2002/el2002-31.html – Marco Demaio May 29 '12 at 13:07

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