Sovereign debt and the fiscal crisis

THE sovereign debt crisis has not gone away. Greece is still paying double-digit yields on its bonds. This column had a go at ranking the most vulnerable countries earlier this year, based on a variety of measures.

Barclays Capital has produced a more sophisticated version, which also has the benefit of including a wider variety of countries. All told, it uses 16 different criteria divided into five broad categories; solvency, fiscal needs, external dependence, financial sector strength and institutional strength (this last cateory based on World Bank governance indicators).

The result would have been a shock to anyone 15 years ago but will not be such a surprise now. The safest 10 countries include five from Asia, two from Latin America, one from Africa and only two from Europe. The ranking, in order, is; Hong Kong, Singapore, Korea, Chile, Taiwan, Germany, South Africa, Czech Republic, Malaysia and Uruguay.

Greece is not quite ranked last; Lebanon takes that dubious honour. After those two, the weakest countries in order are: Pakistan, Vietnam, Ukraine, Egypt, Ireland, Lithuania, Italy and Romania. Six Europeans in the bottom 10!

Of course, there are plenty of developing countries that are not included but it is still striking to see, for example, Italy ranked lower than El Salvador. All told there are 48 countries in the rankings with the US and UK just above halfway at 20th and 22nd respectively. Only 20 years after the fall of communism and the US is ranked lower than Russia!

This is not just a matter of national pride. Barclays reckons that some 70% of the variability in credit default swap spreads is down to the criteria used; the more you fall down the rankings, the more you are likely to pay.

Incidentally, I thought the comments went slightly off at a tangent in discussing whether Henry Ford really used the strategy described by Arun Motianey in yesterday's note. I agree a company couldn't really prosper by paying its workers to buy its goods; that is why I used the bootstrap analogy. The reference was designed to encourage thoughts about whether the finance sector's expansion (or economic stimulus plans) amount to the same flawed strategy.