Which Country Goes Bankrupt Next? (Hint: It's Not Who You Think)
When Greece defaulted on its government bonds in March, it was the first country of any size to take such a step since the great Argentine default of 2002. It won't be the last.
Now, quibblers contend that Greece didn't really default on its debt. Instead, the country presented its creditors with a take-it-or-leave-it offer: Write off all but 46.5% of the debt, or watch Greece declare bankruptcy and lose it all. (They took the 46.5%).
But that's still a technical default -- and that's now what Belize is proposing to do, too.
Default by Facebook
According to The Wall Street Journal, Belize is telling its creditors that unless they write off 45% of its debt, or give it a 15-year holiday from debt payments, the country will default on the whole shebang.
That's $543.8 million in bonds -- poof! -- gone.
As an added insult, the government didn't even do its creditors the courtesy of notifying them of its plans directly. Instead, it posted a note on the webpage for the Central Bank of Belize. (You check its updates daily, right?)
But lest you think this is a little amateur hour, Belize demonstrated its seriousness on Monday by skipping a $23.1 million bond payment that was due. If it doesn't make a catch-up payment within 30 days, the government will technically already be in default -- and will have nothing to lose by taking the next logical step and defaulting on all the rest of its debt.
26% Interest? Sign Me Up!
Investors who think Belize is bluffing may be enticed by the 26.3% interest its bonds are yielding today. Standard & Poor's, however, is taking the country at its word. When the default notice first appeared on the website, the debt monitor cut its rating on Belize's bonds to "CC," just a couple notches short of total default.
Even if 26% interest rates don't entice you into investing in developing world bonds, don't make the mistake of thinking that Belize's threatened default doesn't affect you at all. The fact is, while Belize has a $75 million budget deficit today, and owes moneylenders a sum totaling roughly 80% of its annual gross domestic product, a lot of countries are in similar financial straits -- or worse.
Yes, You Should Be Concerned
According to the IMF, 25 countries "boast" debt levels (as a percentage of GDP) higher than that of Belize. What's more, many of these countries are of sufficiently low profile that you might have trouble placing them on a map. (Saint Kitts and Nevis? What is that? A country or a cognac?)
But several debtors on this list are major players on the global stage. They're big enough, and important enough, that there's a good chance your 401(k), your pension plan, and many of the stocks you own have invested in their debt, or do business there -- business that's likely to suffer in the event of a sovereign default.
Take a look. See if anyone on this list concerns you:
Not Every Bug Goes "Splat!"
Now sure, topping this list is Japan. And yes, this proverbial economic "bug" in search of a windshield has consistently managed to dodge bankruptcy concerns for decades. But just one notch down from Japan is Greece, with debt of 161% of GDP -- post-default.
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When Greece defaulted on its debt this year, it was basically able to dictate its terms of payment to the bankers who had bailed it out. Already, analysts are speculating that Greece's success in debt reduction by government fiat may spawn imitators in other severely indebted countries. As one investment banker in London put it recently: "Greece set a precedent for, 'Here's what you're going to get, take it or leave it."'
Now, thanks to Belize -- half a world away from Greece, and just weeks away from bankruptcy itself -- we're on notice. The risk of sovereign debt defaults spans the globe, and includes countries in far looser financial straits than Greece.
Our own United States, included.
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Motley Fool contributor Rich Smith has no financial interest, short or long, in the bonds of any country named above. United States included.
