Wall Street will tell you that government bonds issued by advanced Western countries are the safest investments money can buy.
But recent events have made a mockery of that idea. If it weren’t for international rescue packages, Greece, Ireland and Portugal surely would have defaulted on their bonds.
Don’t think the trouble’s going to end there. Spain’s finances are in trouble. Italy’s net debts are 100% of its gross domestic product.
Germany’s OK and so is Switzerland. But how much of Europe’s bad debts are their banks holding? Money men here in London suspect that the German banks are the new Lehman Brothers Holdings Inc. LEHMQ, hiding massive losses in places like Spain down in the fine print.
Elsewhere, public finances are in disarray. Japan’s debts are off the charts, more than twice the size of the economy.
America’s net national debt is just hitting 100% of GDP and is rising quickly. The country can’t even fix its own problems. Last Friday was a harbinger: The United States came within an hour of an embarrassing government shutdown. That crisis probably won’t be the last.
Yet Wall Street continues to insist that U.S. Treasury bonds are “risk-free.”
In this mess, who can you trust? If you fear a meltdown, which countries, if any, actually have safe and sound public finances?
There aren’t many.
According to the International Monetary Fund, only a handful of countries are really rock solid.
They include Australia and New Zealand, as well as the countries of Scandinavia — Denmark, Finland, Sweden and Norway.
While most developed countries have racked up huge debts, these guys have kept their liabilities small in relation to their economies, according to the IMF. They have well-funded public pension plans. A few have no net debts at all.
The country with the strongest finances? Norway.
By the IMF’s own calculations, Norway’s public savings exceed public debts by 160% of GDP.
No kidding: In the IMF’s tables, Norway’s “net debt” figure comes up with a big minus sign.
Nowhere else comes close.
The reason for this miracle? Norway has a ton of North Sea oil. But instead of blowing its oil windfall on tax cuts and a housing bubble, like any normal country, Norwegians decided to save for a rainy day.
They’ve diverted their oil revenues into the Government Pension Fund Global, which the Ministry of Finance invests in a diversified portfolio of stocks and bonds — outside the country.
The fund is now worth $512 billion, making it the second-largest sovereign-wealth fund in the world.
Some will say they’re lucky. Look at all that oil.
But lots of countries have precious natural resources. Most just blow the money. The United States hasn’t been short on oil, coal, natural gas and any number of other resources. And look at our national debt.
Great Britain had a lot of North Sea oil, but it is also heavily in debt. Most of the money went to finance tax cuts in the 1980s, and unemployment insurance for millions of unemployed.
Most countries use public pension money to buy their own bonds. Norway’s money goes abroad.
By law, Norway can only spend the fund’s real return each year — after deducting inflation and costs. Last year, that paid 13% of the government budget.
Norway’s fund is mostly managed directly by the Ministry of Finance. But it has made a real annualized return of 3.1% a year since 1998. (That was when it first became a properly diversified fund of stocks and bonds.) That’s after inflation and costs.
Total gain: 49%. Not bad.
Bear in mind that 1998, near the peak of the stock-market bubble, was a poor year to start investing in stocks. Bear in mind too that these returns are in krone. The krone has boomed during that period, depressing returns in local terms.
For most of that time, the fund was 60% bonds, 40% stocks. Now it’s the other way around; the weighting is heavily toward Europe.
To put this in context: According to FactSet, over the same period a Norwegian investor in Vanguard’s Total (U.S.) Stock Market Fund would have made just a 23% return (in krone). In Vanguard’s International Stock Index fund he or she would have made 46%, and in the Total (U.S.) Bond Market Index Fund, 57%.
As for costs? They come to just 0.1% a year.
The real twist here is that despite all this, Norway’s government bonds currently pay higher rates of interest than U.S. Treasury bonds. (Admittedly, a U.S. investor has to take account of exchange-rate risk: If the krone falls against the dollar, you’ll get less back. If it rises, you’ll get more.)
Ten-year Norwegian bonds, which you can buy through a broker, yield 3.9%. A 10-year U.S. Treasury: 3.5%. Which one would you rather own?
Brett Arendsis a senior columnist for MarketWatch and a personal-finance columnist for the Wall Street Journal.
