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Poor George Papaconstantinou. The Greek Finance Minister evidently thought the worst was over. On Sunday, while he was angling for an emergency loan package from the International Monetary Fund, he went on TV to deliver a warning to the speculators who were betting Greece would default on its debt: "All I can say is that they will lose their shirts."

Rising to the challenge, the speculators duly sent Greek bonds sinking faster than a granite life jacket. By Wednesday, the day after the bonds were downgraded to junk status, the yield on two-year Greek notes leapt to a record 24 per cent. That's a level that screams "bankruptcy" or "debt restructuring." The yields on other debt-choked euro zone countries - Ireland, Spain, Portugal - also soared as the Greek contagion spread like wildfire.

Note the names of the countries with the painfully high bond yields and gaping credit default swap (CDS) spreads. Each belongs to the Organization for Economic Co-operation and Development. The OECD's 30 members, from Australia to the United States, are the world's wealthiest countries. It is the equivalent of yacht club membership for aspiring states moving up the industrial and lifestyle ladder.

Now note the names of the countries whose bonds have, relatively speaking, performing admirably amid the rubble of the debt and currency markets. They include Turkey, Brazil, Russia and Indonesia, among other developing countries (also known as emerging markets).



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Not long ago, conservative investors were wary of the debt of developing nations because of their reputation for periodic blow-ups, opacity, corruption, general economic mismanagement, the odd shooting war and other nasties.

Today, the situation is reversing itself. It is debt of the developed world that is becoming risky, while emerging market debt is going in the opposite direction. "The line between emerging market and developed world debt is becoming increasingly blurred," says Jane Lesslie, RBC's senior portfolio manager in London for emerging market bonds. "It's now much more about which countries are leveraged and which are not."

The switch is happening quickly. In the wake of the Tequila Crisis that started in the mid-1990s in Mexico, followed by similar meltdowns in Asia, Russia and Argentina, you could buy Brazilian debt at bargain prices. The widely traded series of Brazilian bonds due in 2040 could be had for 41.5 cents on the dollar as late as 2002, shortly before the election of President Luiz Inacio Lula da Silva. Thanks to Brazil's emergence since then as a high-growth economic power, those same bonds now trade a 132 cents on the dollar (that is, if you to buy $1-million par value, you'd have to pay $1.32-million, plus accrued interest). Their yield is a mere 3.83 per cent. Compare that to the outrageously high yields of the debt of Greece, Portugal, Spain and other allegedly rich countries.

Russian bonds are hot performers too. Take the country's 2028 bond series, issued with impeccably bad timing in June, 1998. Two months later Russia defaulted on its debt. Today the same bond trades at 173 cents on the dollar, giving these little beauties a yield of 6 per cent. As if to rub it in that Russia is a safer credit than Greece, the CEO of state-owned Vnesheconombank, Vladimir Dmitriev, on Wednesday said the bank would consider giving loans to Greece, as it did to Iceland. For Greece in particular, and the European Union in general, the offer must have been embarrassing.

The risk shift between emerging markets and the developed world is unlikely to change any time soon, as the debt throughout the OECD countries climbs relentlessly, taking bond risk - real and perceived - up with it. Britain's debt-to-GDP ratio is 69 per cent and could easily rise to 100 per cent or more. Russian government debt is about 8 per cent of GDP. Before it defaulted in 2001, Argentina's was 62 per cent.

One way to measure the split is through the CDS spreads. A CDS is a way of buying or selling insurance against bond defaults. On Wednesday, the trading screens were quoting five-year CDS spreads on Greek debt at 890 basis points. That meant it cost $890,000 to buy default protection for every $10-million of bonds.

That's hideously expensive. On the same day, CDS spreads on Turkish, Russian, Brazilian, Mexican, Egyptian, Indonesian and Chinese debt were all well less than 200 basis points. China's was less than Britain's and almost identical to Japan's and France's. "The behaviour of bond prices and risk premiums we are seeing in countries such as Greece and Portugal is very typical of that seen in emerging markets during their periods of crisis," Ms. Lesslie says.

Making things worse for the OECD countries is their lack of growth and their rapidly aging populations, which inevitably will lead to a pension crisis. The emerging markets have younger populations. Most do not have pension problems. The IMF used to be busy bailing out emerging market countries. Now its clients are in the industrialized world. What a difference a year makes. Maybe the OECD should rename itself the Organization for Economic Collapse and Desperation.

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