By BRETT ARENDS
Investors these days> are happy to lend money to risky companies pretty cheaply.
But the government of Ireland? Right now it would be hard-pressed to borrow long-term money at almost any rate of interest.
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.
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.
Yet lending money to Uncle Sam for 10 years at 3.5% is considered "risk free."
And while Ireland's problems are big in relation to its own economy, they are tiny in relation to that of the European Union. Ireland is just 2% of the EU economy.
Ireland's gross debts are projected to reach 184 billion euros ($260 billion) by 2013, according to the IMF. To put that in context, Germany's government revenues last year came to 1.1 trillion euros ($1.56 trillion).
Indeed, Ireland's entire debts amount to less than 5% of the total revenue of the euro zone's 17 governments and its net debts are about 3%.
There is plenty of money to handle this thing if the governments of Europe want to do so. Indeed, out of the European countries deemed to be rocky, only Spain and Italy are big enough really to matter. Greece and Portugal, like Ireland, are tiny in relative terms.
Europeans have a lot of capital personal, political and financial invested in keeping the EU and the euro going.
"What is the probability of Ireland having to default?" asked Mahoney at Davy. "Close to zero."
The biggest danger, he said, is simply that of the vicious circle: Investors fear default, so the country can't raise new money. Ireland has support at least through 2013 from the EU, ECB and IMF.
Dan Fuss, manager of the Loomis Sayles Bond Fund and one of the wiser figures in the bond market, is buying Irish bonds for his fund. The main concern for U.S. investors, he said, is merely one of exchange rates: The euro has risen quite a bit recently. If it falls, your returns fall in dollar terms.
But, Fuss added, Irish bonds are now paying so much that he feels you're being compensated.
What are the dangers? There are so many known unknowns, and unknown unknowns, in this situation, that forecasting the future may be a fool's errand. So, instead, let's look at this thing from the other way around.
Ten-year Irish bonds are today offering a yield-to-maturity of 9.6%.
Let's imagine the government can't escape default, and is forced to renegotiate with creditors down the road.
Let's say it cuts coupons and principal repayment by 10% each.
In that scenario, your investment return from here still averages 8%.
If the government cuts coupons and principal by 20%, you still end up earning more than 6%.
Indeed the Irish government would have to cut coupons and principal by a third before it brought your total investment return down to just 3.5% a year or the rate currently offered on 10-year U.S. Treasurys.
There are no guarantees. But the odds are certainly intriguing.
Brett Arends is a senior columnist for MarketWatch and a personal finance columnist for the Wall Street Journal.