Sovereign-Debt Risk – Best and Worst

Sovereign debt is the bonds that are issued by national governments in foreign currencies with the intent to finance a country’s growth. The risk involved is determined by whether that country is a developed or a developing country, whether that country has a stable government or not and the sovereign-credit ratings that are attributed by agencies to that country’s economy. Countries that default on payment will have trouble getting loans in the future (unless you are called Greece, for example and then the troika will systematically have to give you a short back and sides as a haircut, trimming the debt you once had).

But, how are countries perceived as being more or less risky? Nobody would say that today the US economy is raring to go and things are picking up. Economic growth is too slow and unemployment is making few if any breakthroughs.

Take the example of the plight of Detroit today. Detroit is bankrupt and has filed for Chapter 11, in debt to the tune of $18.5 billion. Motor City once had a population of 1.8 million people (1950) but now it has dropped to a dismal 700, 000 today. Companies have upped sticks and moved out of Detroit, suffering from the gangrene of corruption and fraud and resulting in massive drops in fiscal revenue. The average household earns a salary of just $28, 000 a year and 36% of the population are currently living in poverty. Kwame Kilpatrick is now serving a prison sentence for corruption while he held the office of mayor in the town. Only half of the town has street lighting at the present time and criminality is the highest it has ever been for the past forty years. Hardly looks as if it is a sound economy and yet will that have an effect on the US credit rating?



But, on the other hand despite economic indicators in the field such as in Detroit, the rating agencies are optimistic. The question as to why they might be is a whole different kettle of fish, however. Let’s take the example of Moody’s. Moody’s changed the outlook of the Aaa US economy just a few days ago, replacing the negative outlook that has been slapped on the USA to ‘stable’. According to Moody’s, the Congressional Budget Office prediction is on target to see the budget deficit to fall to 4% of GDP (while it was 7% in 2012). Estimates show that the change in grading has something at least to do with the reduction in the quantity of money being allocated to Medicaid and Medicare. Medicaid will see a fall of $77 billion (2%) and Medicare a fall of $85 billion (1.2%) between 2014 and 2023. But, that’s not to say that spending on health as a proportion of overall spending is not set to rise. It is by 30% over the next decade.

The two examples of how bad and how good the USA economy is perceived and what is actually happening in the USA both have some effect on the perception of the USA by the rest of the world. But, does that have an effect on the risk associated with the country or not? S&P Capital IQ (McGraw Hill Financial) has just published a report showing the global sovereign debt of countries listing those that are the worst and those that are the best in comparison with last year. The report uses the cumulative probability of default (the probability of a country not being able to honor its obligations in terms of debts). So where does the USA stand today?

The USA is still one of the least risky sovereign credits in the world today. It has moved up from 5th position this time last year to 4th today. Its Cumulative Probability of Default (CPD) stands at 2.44% today. That improvement according to the report is due to the target that seems to be within reach regarding unemployment in the country dropping below 7% at some time in the near future.

The other countries are as follows:


Creditworthiness: Norway 1st!

Creditworthiness: Norway 1st!

  • Norway is in 1st place and the country that has the least risk in the world today in the second quarter of 2013. It has a CPD of just 1.61%. The Norwegian credit rating is Aaa (stable).
  • Sweden comes in at 2nd place with a CPD of 1.94%. The Swedish credit rating is Aaa and stable (Moody’s).
  • Finland is in third position and like the two preceding countries there is no change in the ranking in comparison with 2012. It has a CPD of 2.32%.Moody’s credit rating is Aaa and Negative.
  • Switzerland is in 5th position just after the USA with a CPD of 2.7%, which is an improvement on last year’s 7th place. The Swiss credit rating is Aaa and stable.
  • Denmark is in 6th position with a CPD of 2.74%, dropping two places in comparison with last year. The Danish credit rating is Aaa and stable.
  • Germany also falls by one place with a CPD of 2.85%, in 7th place. The German credit rating is Aaa and stable.
  • Austria has a CPD of 3.49% and improves its ranking by two places (moving from 10th to 7th place). Austria has an Aaa-credit rating and is negative.
  • The UK enters the top ten in the ranking and has a CPD of 4.38%. The UK has a credit rating of AA1 and is negative.
  • The Czech Republic is in 10th position and also is a new entry in the rankings, with a PD of 4.76%. The Czech Republic has a credit rating of A1 and is stable.


Creditworthiness: Argentina Worst!

Creditworthiness: Argentina Worst!

The worst countries in the world in terms of probability of defaulting on the repayment of their debts is as follows:

  • Argentina is in 1st position and is currently the country that is most likely to default on its debt repayment in the world. It has a CPD of 81.62% and it was also in the same position last year. Argentina has been unable to meet debt repayments since 2001, defaulting as from 2002 on its external debt. Capital fled Argentina and brought about growing problems of borrowing money from that date onwards.
  • Cyprus remains in 2nd position again this year with a CPD of 65.51%. Cyprus was downgraded to junk status by rating agencies and it became impossible to find funding overseas. A €10-billion bailout was provided in March 2013 (on the proviso that the 2nd largest bank, Cyprus Popular Bank, would be closed down).
  • Venezuela is in third position and moves from last year’s 4th position with a CPD of 51.36% chance of defaulting. The presidential elections that took place in April were mired in doubts about the legitimacy of Maduro’s election. There are growing concerns over his ability to implement economic policies that are undermining governability of the country.
  • Greece is a new entry into the listing in 4th position and it has a CPD of 48.56%. Greece’s coalition government is in disarray. The people have taken to the streets amidst the crisis of the laying off of thousands of public service workers and their redeployment to other sectors. Unemployment has hit record levels and in particular youth unemployment which is reaching 60%.
  • Egypt remains in position 5 from last year with a CPD of 46.39%. New political volatility in Egypt means that there is still risk of defaulting on the payments. Furthermore, the economy there has seen very little change at all since Mohammed Morsi was voted into power. Now that he has been ousted, there is growing concern that this will worsen the situation of uncertainty in the country. Total foreign debt currently stands at $44 billion (94% of GDP) and this now looks set to rise in the wake of the coup.
  • Pakistan has a CPD of 45.79% and that is an improvement of 3 places from last year’s position 3. Their bad rating is due to political instability and falling currency reserves in the country. Also, the country will have to pay back $7.5 billion before 2015 to the International Monetary Fund. The ability to take economically-sound decisions is also hindered by the intertwined judiciary, the military and corrupt political leaders.
  • Ukraine moves up from being ranked 6th last year to 7th place this year with a CPD of 44.25%.
  • Portugal also moves up one place from 7th to 8th place with a 30.32% probability of defaulting. Portugal has also seen political tensions over the past few months. Borrowing costs have risen in the last few days to a 7-month high amid demands by Socialist opponents to the government to renegotiate the bail-out deal (€78 billion) with the EU. Unemployment is also at a record high of 18%.
  • Lebanon remains in 9th place with a 29.55% probability. Lebanon’s borrowing cost has increased to record levels over the past ten months as Hezbollah has joined in the war in Syria. The cost of ensuring the debt (which stands at $34 billion) increased as a consequence. This is the single-most important factor of risk for the world: the fact that Lebanon may be dragged into the Syrian conflict more and more.
  • Iraq is a new entry in 10th place with a 27.93% CPD.



So, the least risky countries are the Scandinavians and the worst countries in terms of defaulting are Latin American countries today in the 2nd quarter of 2013. How long will it stay that way? The problem with risk is that the countries that are the ones that have the highest risk of defaulting will no longer be able to find financing, or at most with great difficulty. That means that their situations will only become worse.

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