Business oportunities

Bonds issued by governments are generally regarded as risk free in the sense that it is assumed that there is zero default risk. The implicit assumption is that if a government could not redeem its bonds it always has the option of printing more money. This assumption has always been flawed as holders of bonds issued by Napoleonic France, pre-revolution Russia and China would have found. Many of these bonds still exist but are traded as collector items for aesthetic reasons.
In more recent years experience with Argentina, Brazil and Mexico in the mid-1980s has also showed that this is a fallacy when the bonds are issued in a foreign currency and bought by foreign investors. In most OECD countries today, however, these government’s securities are generally regarded as providing a risk-free return. In the early part of this century Japanese governments ran significant deficits, funded by bond issues, to try to break out of their deflationary slump. Despite continuing current account sur pluses and massive foreign currency reserves they had to suffer the indignity of being warned by rating agencies that the status of their debt was under review.