Sovereign Credit Stages a Tentative Recovery Sovereign creditworthiness is showing tentative signs of improvement, but there is still little feel-good factor in the global economy, according to Institutional Investor’s semiannual Country Credit survey.
The average credit rating of countries around the world edges up 0.4 point, to 44.5 on a scale of zero to 100. The modest increase, the first such gain in 18 months, mainly reflects improvements in Eastern Europe and parts of Asia, which offset continuing declines in Western Europe and a sizable drop in the Middle East. The rating is still well below its peak of 48.0, tallied in September 2008, just before the global financial crisis erupted with the collapse of Lehman Brothers Holdings.
Although the survey contains a sprinkling of positive developments, respondents say the improvement is fragile. “I’ve been doing this for quite a while now, and I’ve never seen so many downside scenarios, and I’ve never seen so many uncertainties,” notes Paul Koenekoop, head of country risk research at ING Group in Amsterdam. “The risks in some European countries may be a little bit overestimated, but some of the risks in a number of fast-growing emerging markets are maybe a little underestimated: Even though they have been doing so well for the last few years, they still have their structural problems.”
Europe, with its toxic cocktail of sovereign debt crisis and recession, continues to suffer some of the worst ratings downgrades, led by Spain, whose rating drops 7.1 points. Madrid is negotiating a possible bailout program with European authorities, which European Central Bank president Mario Draghi has insisted is necessary before the ECB will support the country’s debt. “There is a realization that the potential contingent liabilities of the sovereign emanating from the banking sector are higher than people had realized,” says Victoria Marklew, head of country risk management at Northern Trust Co.
In Asia, China falls 1.8 points, apparently reflecting fears of a hard landing, but many of the region’s frontier markets post strong gains, including Mongolia (+5.3), Myanmar (+5.4), the Philippines (+1.4) and Vietnam (+2.7).
In the Middle East, Syria, which appears to be on the verge of a full-scale civil war, suffers the biggest decline, down 6.9 percentage points, while Egypt, where new President Mohammed Morsi has moved to curb the power of the military, sheds 4.9 points.
How We Compiled the Ratings Institutional Investor’s Country Credit ratings are based on information provided by senior economists and sovereign-risk analysts at leading global banks and money management and securities firms. The respondents have graded each country on a scale of zero to 100, with 100 representing the least likelihood of default. We weighted participants’ responses according to their institutions’ global exposure. Names of respondents are kept strictly confidential.
The September 2012 Country Credit survey was conducted by II staff under the guidance of Senior Editor Jane B. Kenney.