An Irish Bond Bomb

Finally, some earnings news worth writing your home about. Santos (ASX:STO) delivered some welcome news to the share market by announcing a full year net profit of $1.65 billion. That was a 360% increase over the previous year’s figure of $360 billion.

The big kicker for the company came from the sale of its 40% stake in its Gladstone LNG project in Queensland. Last May it sold that stake for US$2.5 billion to Malaysia’s Petronas. But even if you back out the contribution that sale made to full-year net profits, underlying net profit was still up 42% from $403 million to $571 million.

No business is recession proof. But what you want is a company that can increase earnings without increasing its capital expenditure. Santos sold off a stake in asset whose market value is appreciating. And in the longer-term, Australia’s LNG business is positioning itself as an alternative to oil. There’s growth to be had. This why the LNG industry has regularly featured in Kris Sayce’s tipping over at the Australian Small Cap Investigator.

The sale also gave Santos a year-end cash balance of $1.6 billion, with net debt of $506 million. Any debt in this market is an issue, although Santos says it has an un-drawn credit facility of $700 million. But the key for the company is the asset portfolio. It reckons that will get it through what are turning out to be lean times for everyone-from households to corporations to national governments.

Yes. That is easily the biggest and most disturbing story today. Credit spreads in Europe indicate investors are getting nervous about governments in Spain, Ireland, Greece, Portugal and Italy. The spread between ten-year government bonds in these countries and a ten-year German bonds is widening.

What’s more, the credit default swap markets now appear to be factoring in the possibility that certain national governments in Europe may simply default on their debt. Take, for example, Ireland. According to the Times of London, the pledges made by the Irish government to support its banking sector amount to 220% of the country’s GDP.

The Irish government has promised to bail out its banks. But who’s going to bail out the Irish government? That’s what everyone’s starting to wonder. And that’s why-in addition to the billions in loans made by Western European banks to Eastern Europe-the euro is looking shakier by the day.

But will Germany and France allow a single member of the euro-currency bloc to default on its debt? Not only would it undermine confidence in the Euro has a viable currency, but it would also d set off a mad divergence in the European bond market. “European officials have already expressed concern that their bond market could potentially face a crisis similar to that unleashed by the collapse of Lehman Brothers Holdings Inc. in September,” reports Bloomberg.

We’ve said before that this worldwide financial crisis will take down a few national governments with it and not just big firms. And now you see that it really is possible. As ECB board member Lorenzo Smaghi said, there’s now a “risk that the mistrust that there is today in financial markets is transformed into mistrust in states.”

Hmmmn. What might that mean?

Well it might mean that more people are beginning to see States in a different light. Rather than seeing states as the (most of the time) democratically elected representatives of the people, people see something much more feudal. They see a set of elites who achieve and maintain their position by looking out for the economic interests of a small group of elites, including themselves.

This is not so different that the clergy, the Crown, or the gentry calling the shots. Different faces. Different trappings of legitimacy. Same result, even though it’s several hundred years later.

Granted, even if we live in a kind of indentured servitude today-heaped up with public and private debts that can never be paid off-the standard of living is much higher today than it was in the seventeenth century. You have cable TV, fried chicken, and 3,000 calorie iced coffees. That beats eating dirt.

But whether or not the modern world bears a striking resemblance to the medieval world (with a few bells and whistles) isn’t the object of today’s inquiry. Instead, we would point out that doubts about the integrity of the global financial system and the institutions that regulate it (governments) are very bad for share markets.

With earnings not likely to recover any time soon, we’d expect to see the market make a new low as the gold price makes a new high. It’ll happen sooner rather than later. And after that? Stay tuned…

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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3 Comments on "An Irish Bond Bomb"

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“$1.65 billion… was a 360% increase over the previous year’s figure of $360 billion.”

That doesn’t compute.


Hi Dan,

Is that the ghost of Gono making you type a “b” instead of a “m” (…announcing a full year net profit of $1.65 billion. That was a 360% increase over the previous year’s figure of $360 billion.) I suppose its good practice what with the governments around the world about to put the printing presses into overdrive.

Revolutions have been started by less inequity than there is in our current societies. That private banks can be bailed out of their mistakes, yet other non bank private companies can not (simply because we can not bail out everyone), demonstrates this aptly. That our money is now preventing bankers from seeing their corporations fold, and is additionally required to be paid to these said bankers to fund their bonuses. If there was any equity in our World these men would be unemployed and the system they operated to its’ own destruction knocked down to the foundations and rebuilt into… Read more »
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