Risk is always a question of perception and different people have different ideas about what constitutes an unacceptable risk – the same applies to the world of investing. Investment grade stocks and bonds do cover a spread of risks, but if you buy such vehicles, you are highly likely to get all of your money back and earn the stated interest. In the financial world, risk and reward are directly linked with higher (perceived) risk being rewarded with higher interest paid.
At the height of the Global Financial Crisis, Ireland’s property bubble burst. The bubble had been inflated by an attitude of easy money for speculative property deals and construction from the banking sector, so when the bottom fell out of the market, Irish banks were left with a lot of “toxic” debt. Fearing a collapse of its financial sector, the Irish government propped up the banks and sought to calm markets by assuring investors that they would backstop the sector. Ratings agencies downgraded their assessment of the risk associated with Irish bonds. The market was sceptical and Irish borrowing costs started to rocket. In the end, Ireland was effectively frozen out of the money markets by prohibitively high borrowing costs, leaving the nation little choice but to take an IMF/EU bailout, worth €67.5 billion, in late 2010, to ensure that it could meet its obligations.
Ireland was eventually able to re-enter the money markets this month, selling €3.75 billion worth of bonds for an average yield of 3.5% - substantially below the 15% demanded at the height of the crisis. The nation exited the bailout programme last month; the first of the recipient nations to do so.
Moody’s, the only one of the three major ratings agencies to declare Irish bonds as “junk” has just upgraded the rating to BAA3, restoring its investment grade rating to Irish debt.