Country creditworthiness edges higher but Mideast unrest and Western deficits cloud outlook Sovereign creditworthiness improved slightly in the past six months, driven mainly by a rebound in ratings for the U.S. and much of Europe, but countries in the Middle East and North Africa are seeing their ratings plummet because of the unrest spawned by the political uprisings in Tunisia and Egypt.
The average creditworthiness rating of countries in Western Europe climbs 2.8 points, to 80.9 on a scale of zero to 100 from 78.1 in September 2010, according to Institutional Investor’s semiannual Country Credit survey. Eighteen of the region’s 19 countries post gains, with the U.K. rising 6.3 points, Italy increasing by 6.0 points and Spain up 5.3 points. The increases represent only a partial reversal of the steep declines that followed the global economic crisis in late 2008 and early 2009 and the outbreak of Europe’s debt crisis last year, however. The region’s current average rating of 80.9 is well below the peak of 91.1 reached in March 2008. The rebound also bypassed Ireland, which obtained an €85 billion ($113 billion) bailout from the European Union and International Monetary Fund last year to cover the cost of rescuing the country’s banking system. Ireland’s rating falls 6.5 points, to 61.0. When asked to name the countries most likely to exhibit higher credit risk in the next 12 months, analysts surveyed put Portugal, Spain, Ireland, Greece and Italy at the top of the list.
Respondents show a similar ambivalence about the U.S., where a new Republican majority in the House of Representatives is pushing for deep cuts in federal spending to narrow the deficit. The country’s rating edges up 0.7 point, to 91.4, but respondents rate the U.S. in eighth place among countries most likely to pose a higher credit risk in 12 months.
The average credit rating of countries in the Middle East and North Africa is effectively unchanged, at 55.6, but voting for the survey was conducted in November and December, before the uprisings broke out. A snap poll of survey respondents taken in late February shows a sharp drop in ratings across the region but mixed views on whether the political tumult will prove positive or negative in the long run. Egypt’s rating plunges to 37.4 in the snap poll, from 51.1 in the regular survey, for instance. Although half of the snap poll respondents say they believe political change will have a very negative or somewhat negative impact on the country’s creditworthiness over the next three to five years, the other half say the impact will be neutral or somewhat positive.
The industrialized nations of Asia advanced, with ¬Australia rising 2.3 points and Singapore and Taiwan each gaining 1.4 points. Japan jumps 4.5 points as optimism about the economic rebound outweighed concerns about the country’s debt. The survey was conducted before the devastating earthquake and tsunami struck the country. Asia’s emerging economies were mixed, with China edging up 0.4 point and Vietnam declining by 1.8 points.
How the Ratings Are Compiled The Country Credit ratings developed by Institutional Investor 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 also asked participants to rank ten political, economic and financial indicators in order of their importance for each region and for selected countries. Participants’ responses were weighted according to their institutions’ assets. Names of respondents are kept strictly confidential.
The March 2011 Country Credit survey was conducted by II staff under the guidance of Senior Editor Jane B. Kenney.