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Brett Arends' ROI
April 5, 2011, 12:01 a.m. EDT
View all Brett Arends' ROI "º
"¹ Previous Column
Ponzi scheme hits mystery hedge funds
First Take "º
Apple and the Nasdaq rebalancing
By Brett Arends
BOSTON (MarketWatch) "” Investors these days are happy to lend money to risky companies pretty cheaply.
They'll lend money to Sprint Nextel Corp. /quotes/comstock/13*!s/quotes/nls/s (S 4.57, -0.05, -1.08%) for the next decade or so at 6 1/2%. Ally Financial "” the former GMAC "” can borrow at 7.5%. So can homebuilder PulteGroup /quotes/comstock/13*!phm/quotes/nls/phm (PHM 7.45, +0.12, +1.63%) .
But the government of Ireland? Right now it would be hard-pressed to borrow long-term money at almost any rate of interest.
Europe's periphery can't pay its debts. Barring massive transfer payments from the core, particularly Germany, the periphery will stop paying. Which means the core will have to bail out its domestic banks instead.
And its previously issued 10-year bonds are trading at junk levels. The yield: Nearly 10%.
A staggering amount "” and a record yield over German rates.
At a time when you're lucky to get 2% anywhere else, a sovereign bond from a developed country paying 10% a year is worth a closer look.
Yes, there are risks. But you are being paid a lot to take them.
After all, the Republic of Ireland "” unlike most corporations "” has taxation powers, and the backing of the European Union.
Everybody knows the headline news out of Ireland. The economy's imploded. The European Union and the International Monetary Fund had to step in last year with support. Last week, the government said the banks needed another 24 billion euros ($34 billion) of taxpayer money, raising the total cost of the bailout to 70 billion euros ($99 billion), nearly half of GDP.
Public debt levels are skyrocketing, deficits are huge, and sooner or later, or so goes the story, the country will have to default on its debt. Read "One way to end Irish crisis: let banks go bust."
Like most headline stories, it contains some elements of truth.
But there's a lot they're not telling you.
Like the cost of the bailouts. Seventy billion euros? The net cost in terms of public debt is half that, said Donal Mahony, strategist for Davy Securities in Dublin. The rest comes from a public pension fund surplus, and from renegotiation with subordinated creditors of the bank.
The additional cost of last week's 24 billion euro tab: 2 billion euros ($2.8 billion), he said.
Ireland's gross debt is expected to reach about 108% of GDP by 2013. You think that's terrible? According to the International Monetary Fund, the figure for the U.S. will be about 105%. Our net debt position is actually worse than Ireland's, and our current account deficit is twice as big as a share of our national economy.
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co.
By the time you read this, your chances to make money off the rebalancing of the Nasdaq 100 are long gone, writes Chuck Jaffe.
19 min ago2:30 p.m. April 5, 2011
"Is Ireland really going bust? http://on.mktw.net/e5cXGm" 11:36 p.m. EDT, April 4, 2011 from MKTWArends
"Ponzi scheme hits mystery hedge funds http://on.mktw.net/i8iZju" 12:00 a.m. EDT, March 29, 2011 from MKTWArends
"Why AT&T's deal for T-Mobile must be blocked http://on.mktw.net/elV3C9" 9:30 a.m. EDT, March 21, 2011 from MKTWArends
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