SA's stock is on the rise

The Big Read: Investors this month have marvelled at new evidence that South Africa is very much on the radar of global fund managers.

Rand Merchant Bank currency analyst John Cairns calls it a "wall of money" washing into South Africa's bonds, chasing the lure of secure fixed-income yields that can't be found anywhere else in the world.

We can happily pat ourselves on the back. A combination of excellent public relations (courtesy of the Fifa World Cup) and a Reserve Bank that has its eye confidently on the ball, has sent reassuring signals that SA is an environment ripe for portfolio investment.

But before we get carried away with self-congratulations, it is important to reflect on why emerging markets such as ours should be so visibly and profitably in favour. The truth is that it's not so much about us; it's about "them".

Consider that a bond is basically a form of debt. You lend a government money, and it pays you a certain amount of interest (yield) for the privilege. South Africa offers only a limited supply of new bonds every week in an auction. As a result of sustained demand from offshore investors, the price of South Africa government bonds is rising strongly. It is, in effect, a vote of confidence in the country.

Compare this to Europe. Governments in Portugal, Ireland and Spain (not to mention Greece) struggle to get investors to lend them money - mainly because investors are not confident those governments, already awash with debt obligations, will be able to pay them back. They'd prefer to go somewhere less risky - such as South Africa.

The situation in the developed world is complicated by recent history: banks and governments are haunted by the existence of derivative contracts, worth untold sums, born during the subprime crisis of 2007/2008. These contracts, taken out by hedge funds and merchant banks, are effectively massive bets that certain entities will default on their debts.

The most dangerous of these instruments are credit default swaps. In their purest form, they are insurance policies. If you are exposed to the danger of not getting your money back, buying a credit default swap from an insurer like AIG neatly transfers your risk to someone else.

The problem, though, is that outside parties - not necessarily exposed to any threat - can also buy "naked" credit default swaps on any government or company they like. The bet will pay off if the insured party goes bust.

Political analyst William Greider, writing for the Huffington Post, put it beautifully. He likened buying a credit default swap to "taking out insurance on your neighbour's home without owning the house. The incentive to burn down the place and collect the payout is powerful".

You can imagine the paranoia that infects the halls of power to the north of us - and why so much effort has gone into trying to convince the public that banks are "too big to fail" and need taxpayers' money to bail them out.

Michael Lewis, in his excellent account of the subprime crisis, The Big Short, quotes Steve Eisman, one of the few traders to make a fortune during the crash. Eisman reckons banks are not protected because they are critical to the success of the global economy. Instead, the problem is that "some gargantuan, unknown dollar amount" of credit default swaps have been bought and sold on every one of them.

"A bank with a market capitalisation of one billion dollars might have one trillion dollars' worth of credit default swaps outstanding. No one knows how many there are! And no one knows where they are!"

According to Lewis, it's not a matter of whether we'd mourn the passing of any of the big banking institutions.

"The failure of, say, Citigroup might be economically tolerable. It would trigger losses to Citigroup's shareholders, bondholders, and employees - but the sums involved were known to all.

"However, Citigroup's failure would also trigger the payoff of a massive bet of unknown dimensions: from people who had sold credit default swaps on Citigroup to those who had bought them."

For now, the mandarins of the European Union are doing their best to avoid such a situation, bailing out governments and banks alike. So, too, in the US. President Barack Obama last week rubber-stamped legislation that limits the power of banks - but by no means has he said he'd let them fail.

The opposition Republican Party is more hardline. Its "libertarian" wing, in the form of the Tea Party lobby, is growing ever stronger. Among its chief appeals to disaffected voters is its call to let natural economic forces run their course.

The Republican shadow president, Tim Pawlenty, went so far as to tell Esquire magazine in March that he'd be in favour of letting over-indebted institutions go bankrupt. "These markets have to correct," he said.

In a more softly-softly fashion, British Prime Minister David Cameron has been saying much the same thing.

This kind of populist sabre-rattling is scaring a lot of investors. Which, in a roundabout way, brings us back to South Africa - and why we might as well get used to being thought of as a low-risk investment destination.

Who would ever have thought it possible?