“Iraqi officials say that, last year, they wanted to diversify their holdings out of the dollar, as it depreciated, into other assets, such as the euro, more likely to hold their value,” reports Patrick Cockburn of London’s Independent. “This was vetoed by the US Treasury because American officials feared it would show lack of confidence in the dollar.”

This telling tidbit was tucked into the second-day follow-up of Cockburn’s revelation that the pending “security agreement” between Washington and Baghdad will leave Iraq with only the vestiges of sovereignty. If you missed it, here’s Cockburn’s Cliff’s Notes version: “The US will keep more than 50 military bases. American forces will be able to carry out arrests of Iraqi citizens and conduct military campaigns without consultation with the Iraqi government. American soldiers and contractors will enjoy legal immunity.”

These are the terms Team Bush is dictating — and to make sure the new regime complies, Cockburn reports that Washington is holding hostage some $50 billion in Iraq’s foreign exchange reserves currently held in the Federal Reserve Bank of New York — which have sat there going back to the days of sanctions against the Saddam regime.

So Washington has the new Iraqi government by the short hairs. And to think its leaders — who exercise no authority beyond the confines of the Green Zone — wanted to diversify out of the dollar! Surely they knew that Saddam wanted to start selling oil in euros back in 2000, and that was one of the lesser-known rationales for regime change, right?

In any event, Iraqi leaders figure they’ve lost $5 billion in wealth since last year simply because Washington put the kibosh on their currency diversification plans. They’ll surely lose much more as the dollar’s slide progresses in the years ahead… even if Team Bush’s attempts to ram this agreement into force by the end of July don’t incite widespread revolt across Iraq.

And that’s an iffy proposition. As I write, Friday prayers have wrapped up and a second week of street protests against the agreement are underway. Not that you’ll see any of it in U.S. media. We have too many of our own problems on this Friday.

Source: Touching Naivete

A must read for investors seeking to take advantage of the Brazil’s growth is Gary Scott’s article: Why I Like Brazilian Bonds.

This from Gary: “You can borrow US dollars to make multi currency investments from Jyske Bank at rates a bit above and below 4.5% depending on the amount borrowed.

“You can also buy Brazilian bonds that yield around 11%. For example, earlier this month Jyske Bank offered these two Brazilian government bonds: 1) Brazil 12.5% maturing 2016 yield 10.9%, 2) Brazil 12.5% maturing 2022 yield 11.0%

“If you invest $100,000 (the minimum for a leveraged account) and borrow $100,000 at 4.5%, investing both the loan and original investment in Brazil, with $100,000 in each of these bonds…your average return after fees will be about 10%. That works out to $20,000 a year income on $100,000 invested…or 20% per annum.

“Plus, the Brazilian currency has appreciated enormously versus the U.S. dollar. This could add an extra profit.”

Read on to find out the potential downside to investing in Brazilian government bonds and how much risk this investment carries.

Brazil’s currency, the real, makes sense for multi currency diversification because Latin America is the fastest growing emerging region.

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You can borrow U.S. dollars to make multi currency investments from Jyske Bank at rates a bit above and below 4.5% depending on the amount borrowed.

You can also buy Brazilian bonds that yield around 11%.

For example, earlier this month Jyske Bank offered these two Brazilian government bonds:

* Brazil 12.5% maturing 2016 yield 10.9%

* Brazil 12.5% maturing 2022 yield 11.0%

If you invest $100,000 (the minimum for a leveraged account) and borrow $100,000 at 4.5%, investing both the loan and original investment in Brazil, with $100,000 in each of these bonds…your average return after fees will be about 10%. That works out to $20,000 a year income on $100,000 invested…or 20% per annum.

Plus, the Brazilian currency has appreciated enormously versus the U.S. dollar. This could add an extra profit.

Yes, there is risk. The U.S. dollar/real rate could also create a loss.

For example, in the last year, the dollar has dropped versus the real until March. Now the dollar is having a mild recovery. Had you made the investment above in March, you would have experienced some downward pressure on your loan.

Plus, there is always the risk that interest rates could rise, which will reduce the value of the bonds. Brazil’s investment rating could fall. Dollar interest rates can rise. Any of these events would reduce profits and could even create a loss.

These risks are why you should never leverage to invest in currencies more than you can afford to lose.

On the other hand, compare the risk premium. The leveraged Brazilian bonds pay you 20% per annum to take this risk.

But there is risk in holding any investment. The investment that is deemed the safest in the world, U.S. Treasury bonds, has risk. Inflation can (and has for the past 40 years) chew the bond’s purchasing power to pieces.

On the same day that the Brazil bonds paid 11%, the 10-year U.S. bond paid 3.59%.

Add this up for ten years. The Brazilian bonds pay you 20% per annum–that’s 200% over ten years. The Treasury bonds pay 3.59% or 35.9% in total.

Are the Brazilian bonds that risky, we must ask?

The overall picture is not quite this simple but these numbers reflect the general idea.

There are ways to make this type of investing safer such as borrowing more than one currency and/or investing in more than one type of bond. For example, a yen and dollar loan invested in Russian, Turkish, Brazilian, Indonesian, and South African bonds spreads the risk and increases the risk premium.

Gary Scott
For International Living

Editor’s Note: Gary Scott, long-time friend of IL, has been analyzing and writing about global investments for more than 30 years. His multi-currency education service which you can buy today for a dollar teaches individuals how to create their own global, value-oriented investment portfolio that can take advantage of opportunities U.S. investors are often unaware of. Gary will explore this in more detail when he speaks at International Living’s “Ultimate Event” in Cancun, Mexico, May 28-31.