Blog Post

Fact of the week: Norway is the safest place on Earth

Standard and Poor’s published its Global Sovereign Debt report for the second quarter of 2014 recently. The report ranks countries according to the riskiness of their debt, depicting a North-South divide in creditworthiness, with Norway being the least and Argentina being the most risky.

By: Date: September 3, 2014 Topic: Global economy and trade

S&P Capital IQ’s published its Global Sovereign Debt report for the second quarter of 2014 recently . The report ranks countries according to the riskiness of their debt, depicting a North-South divide in creditworthiness, with Norway being the least and Argentina being the most risky.

S&P Capital IQ’s Global Sovereign Debt report for the second quarter of 2014 rates  Norway as the least risky sovereign and Argentina as the most risky one. Norway is followed by Sweden and the US, whereas the UK climbs up to to fourth place, which used to belong to Germany.

The four “eurozone core”’s members (Germany, Austria, Finland and the Netherlands) make up almost half of the top ten, whereas only two “eurozone periphery”’s countries are still among the worst ten. Greece and Cyprus are classified as the 5th and 6th most risky sovereigns, down 2 places and up 1 place respectively. The top three in terms of riskiness remain Argentina, Venezuela and Ukraine.

The issue with the S&P Capital IQ report is that all the rankings seem to be relying heavily on the implied risk profile inferred from Credit Default Swap (CDS) movement, more specifically five year mid PAR spreads. CDS are normally used as a proxy of the cost of ensuring against the default of a certain country. In that respect they should give an indirect indication of sovereign risk. However, the reliability of CDS as indicators of sovereign risk has been often questioned, importantly also by the IMF, because of the relatively low liquidity in part of the market. Moreover, where CDS data for the sovereign is not available S&P report uses a majority state owned national bank as proxy to derive CDS and consequently the CPD of the country. This is the case for India, for which data for the “State Bank of India” is used, and for Tunisia, for which the “Banque Centrale de Tunisie” is used. Figure 2 below (from BBVA research) shows the time series evolution of sovereign CDS spread across countries in the world suggesting that, apart from the case of Norway on the one hand and Greece and Argentina on the other, the CDS does not always yield an uncontroversial ranking.

Source: BBVA research

It is interesting to look complementary at another Sovereign risk indicator that has been recently updated, i.e. the BlackRock’s Sovereign Risk Index (see here for the methodology). This index is an aggregate of many indicators largely grouped in the following categories.

  • Fiscal Space (40% weight), trying to assess if the fiscal dynamics of a particular country are on a sustainable path.External Finance Position (20% weight), trying to measure how leveraged a country might be to macroeconomic trade and policy shocks outside of its control.
  • Financial Sector Health (10% weight), assessing the degree to which the financial sector of a country poses a threat to its creditworthiness, were the sector were to be nationalized, and estimates the likelihood that the financial sector may require nationalization.
  • Willingness to Pay (30% weight), grouping political and institutional factors that could affect a country’s ability and willingness to pay off real debt.

This index has the advantage to also tell what are the roots of sovereign risk, which is the most interesting part, taking account of countries’ specificities (you can build your own rankings here).

Norway is again top of the list, thanks to extremely low absolute levels of debt, an institutional context that is perceived to be strong and very limited risks from external and financial shocks. Germany, Netherlands and Finland still make it in the top 10, whereas Portugal, Ireland Italy and Greece make it to the top wors. Greece is actually the bottom of the list, although this ranking was done in june so admittedly Argentina might have taken over in July.

Fiscal space rating

Financial sector risk

What is interesting is looking at the relative positions on the different subcategories, which can vary even considerably with respect to the overall score. As an example, lets compare the relative rankings in terms of fiscal space and financial sector risk – which can interact in unpleasant way during crises. Norway is a clear outlier in terms of fiscal space ranking (figure 1) whereas it performs less well in terms of financial sector health. The same is true for Germany and Finland, which rank high on fiscal space and significantly lower in terms of financial sector health. Netherlands is strikingly, 14th in terms of fiscal space and in the worst top ten in terms of financial sector heath. China too ranks high in fiscal space and low in financial risk as well.

The relative ranking is extremely interesting, as it clearly visualises that fiscal sustainability (and sovereign risk with it) is far from exact science and there’s nothing more relative in this world as the definition of a  “safe debt”.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic More by this author
 

External Publication

L’Union européenne et les États-Unis, un an après

Après une année troublée par Kaboul et AUKUS, qu'avons-nous retenu de l'an I de la présidence Biden ? Maria Demertzis revient sur les évènements marquants de l'année 2021 pour la relation entre les États-Unis et l'Union européenne.

By: Maria Demertzis Topic: Global economy and trade Date: December 8, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

What to watch in 2022: China's economic outlook

Our end of 2021 recap of China’s economic activities.

By: The Sound of Economics Topic: Global economy and trade Date: December 8, 2021
Read article More by this author
 

Blog Post

European governance

The Global Gateway: a real step towards a stronger Europe in the world?

Disappointment at the lack of fresh cash from European Union global connectivity strategy is short-sighted: Europe supports global development more than any other country in the world. Using existing funds more strategically is the right priority for now.

By: Simone Tagliapietra Topic: European governance, Global economy and trade Date: December 7, 2021
Read about event
 

Past Event

Past Event

China’s medium term outlook: Will innovation save China from becoming old before it becomes rich?

What can China do to stop the deceleration of its economy. Is innovation the solution?

Speakers: Jean-Francois Di Meglio, Alicia García-Herrero and Guntram B. Wolff Topic: Digital economy and innovation, Global economy and trade Date: December 1, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

A new consensus for economic resilience

Is there a need for systemic reform of global economic governance?

By: The Sound of Economics Topic: Global economy and trade Date: December 1, 2021
Read article Download PDF More on this topic More by this author
 

External Publication

Chinese economic statecraft: what to expect in the next five years?

Chapter from 'Storms Ahead: the Future Geoeconomic world order' on the expectations from the next five years of Chinese economic policy, published on 27 October 2021.

By: Alicia García-Herrero Topic: Global economy and trade Date: November 26, 2021
Read about event More on this topic
 

Past Event

Past Event

Fiscal policy and rules after the pandemic

What are the possibilities for shaping the new fiscal policy?

Speakers: Zsolt Darvas, Maria Demertzis, Michel Heijdra and Katja Lautar Topic: Macroeconomic policy Date: November 24, 2021
Read about event More on this topic
 

Past Event

Past Event

Advancing global value and supply chains to mitigate the challenges arising from the pandemic

Session at the 1st ASIA-EUROPE ECONOMIC AND BUSINESS FORUM: Transitioning to a New Normal: Leveraging Global Value Chains, Multilateralism and the 4IR

Speakers: Carmen Cano, Alicia García-Herrero, Jong Woo Kang, André Sapir, Luca Silipo and Tetsuya Watanabe Topic: Global economy and trade Location: Phnom Penh, Cambodia Date: November 24, 2021
Read about event More on this topic
 

Upcoming Event

Jan
20
14:00

Is China’s private sector advancing or retreating?

A look into the Chinese private sector.

Speakers: Reinhard Bütikofer, Nicolas Véron and Alicia García-Herrero Topic: Global economy and trade
Read article
 

Blog Post

European governance

Including home-ownership costs in the inflation indicator is not just a technical issue

The European Central Bank is right to propose inclusion of owner-occupied housing services in the inflation indicator. But the ECB’s preferred method would involve an asset price in the consumer inflation indicator.

By: Zsolt Darvas and Catarina Martins Topic: European governance, Macroeconomic policy Date: November 18, 2021
Read article More by this author
 

Blog Post

Fiscal arithmetic and risk of sovereign insolvency

The record-high debt levels in advanced economies increase the risk of sovereign insolvency. Governments should start fiscal consolidation soon in an environment of low nominal and real interest rates and post-COVID growth.

By: Marek Dabrowski Topic: Global economy and trade, Macroeconomic policy Date: November 18, 2021
Read article More by this author
 

Opinion

European governance

Growth and inflation after the pandemic in the EU

Countries hit comparatively hard during the financial crisis, helped also by domestic and European policies, are bouncing back from the pandemic faster than their peers.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: November 18, 2021
Load more posts