Industrialized countries are dropping like flies into recession. So far, emerging markets have avoided the economic meltdown. But that is changing, says David Newman. He says investors should not be tempted by the huge bond yields on offer in countries like Argentina. In today’s climate, knowing you will get your money back is much more valuable.

This from The Sovereign Society:

I found this chart online and thought it was such a good representation of what is going on that I just had to share it with you. (Thanks to the folks at http://frigginloon.com/ )

As I’ve written about before, this is really just the beginning of the flood of bad news we’re going to continually hear about over the next few months.

As you look back over this list, you’ll notice that none of the emerging market countries are on there just yet. And when they do appear, I’m afraid there will be more red X’s added to the list.

But now countries like Ukraine, Pakistan and Argentina are proving to be almost as vulnerable as Iceland. They borrowed money without real collateral to back those loans. And the industries responsible for making the payments are collapsing.

It seems as though another country is added to the growing list of nations on the verge of collapse almost daily.

Emerging Market Opportunities?

Having just accepted aid from the IMF, Hungary barely avoided sliding into national bankruptcy. And only a $15.9 billion IMF rescue package - bolstered by billions more from the European Union and the World Bank - prevented it from happening.

Analysts at Morgan Stanley estimate that capital flows to emerging economies could fall to $550 billion in 2009 from around $750 billion in 2007 and 2008. Such a sharp drop would hit economies that rely heavily on foreign finance: more than 80 developing countries are likely to run current-account deficits of more than 5% of GDP this year.

Countries do go bankrupt. Iceland is not the first (and will not be the last). Russia was declared bankrupt in 1998, Argentina in 2001 and Germany has a history of going more than once…

The problem is national bankruptcy would probably lead to massive inflation. This is demonstrated by the central bank of Iceland, which increased its prime rate by six points to 18 percent last week. Venezuela, where inflation is also high, is now offering 20 percent to stimulate interest in its government bonds.

And Argentina - having seized some US$29 Billion in private pension funds - has bond offerings yielding upwards of 30%! It’s worth noting; however, that the last time bond yields were this big in Argentina was in the aftermath of an epic bond default in 2001.

In the coming months, you’ll see more and more countries offering these huge double-digit bond yields. Most of these bonds will be coming from emerging markets that are already in trouble due to stifled capital flow.

Don’t do it!

I know your portfolio is probably looking pretty bad right now but this is not where you need to be investing. There’s just way too much risk in these emerging market bonds right now.

Not to mention that some more-developed countries are offering competitive bond yields as well. Sure they pale in comparison to 30% yields in Argentina, but at least you know you’ll get that money back.

On paper, 20-30% fixed-income returns look great. But I doubt you’ll ever see those returns make it to your bottom line.

Source: Don’t do it…