Global Economy: 7 Countries Spooking Investors
Matthew Bandyk

 

Global Economic Risk

While the U.S. deficit might be increasing, there is no serious concern among holders of U.S. treasuries that the country will default on its debt. Despite federal spending consuming 27.2 percent of gross domestic product in 2009, the United States maintains a perfect Aaa rating from the credit rating service Moody's. But you can't say the same about many countries in both the developed and developing world where fiscal profligacy, as well as continued fallout from the economic crisis, is hurting their credit ratings. The economic downturn has made global investors much more worried that these countries are getting closer to bankruptcy, and as a result, it has become more expensive to insure sovereign debt.

This riskiness has been quantified through data provided by Markit. The financial information company provides daily pricing on credit-default swaps, contracts between two parties that provide a kind of insurance on corporate and government debt. When it becomes more expensive to buy a credit-default swap on a government's debt, it generally means that investors see the country's economic situation getting riskier. The countries on this list are ranked by the percentage increase of the cost of their credit-default swaps over the past three months.

But a large increase in the cost of credit-default swaps alone does not mean that a country is especially risky. Swaps on U.S. sovereign debt have increased about 70 percent over the past three months -- one of the highest overall, according to Markit. Some countries can maintain their credit reputation through other factors. For example, the United Arab Emirates has seen the cost of its credit-default swaps explode in recent months. Late last year, Moody's announced that Dubai's debt crisis would likely not lead to a re-evaluation of the United Arab Emirates' debt rating, saying that "the fiscal position of the UAE, and Abu Dhabi in particular, remains healthy." So U.S. News also looked at the countries for which Moody's has a negative outlook on their sovereign debt -- meaning that further downgrade is possible.

The following countries have both a negative outlook from Moody's and increases in the cost of credit-default swaps over the last 3 months. Investors have viewed the economic situations in these countries as increasingly risky bets.

1. Greece

Greece's economic problems contributed to the ousting of the center-right New Democracy party in elections last October, ending a five-year reign.

From the rest of the world's point of view, things only got worse for Greece when, later that month, the European Commission announced that Greece's fiscal deficit stood at 14 percent of GDP -- almost twice what the official Greek government statistics had reported.

Two months later, Moody's downgraded Greece's debt to A2, and Moody's currently gives the country's debt a negative outlook, making another downgrade possible.

Greece is now on track to surpass Italy as the European Union country with the worst budget problems. Eurostat, the EU's statistical arm, recently declared that Greek statistics on the budget still cannot be trusted.

The reaction from investors to all this bad news has been striking: Greek CDS spreads (the cost of insuring its sovereign debt) increased about 156 percent in the last 3 months, the largest increase of any country. It currently costs about $315,000 annually to insure $10 million of Greek sovereign debt over five years.

2. Portugal

Just how deep in the red is Portugal?

Several Portuguese cities are considering razing soccer stadiums in this football-loving country in order to replace them with business developments that might generate more revenue.

The European Commission estimates that Portugal's deficit stands at 8 percent of GDP. Moody's has raised fears that Portugal's economy, like Greece's, is dying a "slow death," although the rating agency says Portugal's fiscal situation is not quite as bad as Greece's.

3. Jamaica

The economy in Haiti has essentially collapsed, which might make its neighbor Jamaica look normal. But by noncatastrophic standards, Jamaica has some of the worst economic problems in the world.

Moody's rates Jamaica's sovereign debt Caa1, one of the lowest ratings possible. The Jamaican government, low on revenue because of the recession, has been attempting to get a $1.3 billion loan from the International Monetary Fund. Such aid might be exactly what is needed to stop investors' spiraling concerns over Jamaica's finances. Last October, there was an annual cost of $764,000 to insure $10 million of Jamaica's debt over five years. It now costs over $1 million -- among the most expensive in the world, and a 31 percent increase since three months ago.

4. Ireland

Ireland was one of the biggest economic success stories of the past few decades. But, in the words of Irish Finance Minister Brian Lenihan, the period from the middle of 2008 to the end of 2009 was one of "unrelenting economic gloom."

Like the United States, Ireland had a housing price bubble that popped, and Irish GDP fell 7.5 percent in 2009. Last summer, Moody's cut Ireland's rating to Aa1. That means that Ireland still has a "very strong" level of creditworthiness. Insurance-rating agency A.M. Best groups countries into five tiers based on the risk to insurers posed by the countries' economic, political, and financial systems.

A.M. Best gives Ireland a "moderate" level of economic risk because of the "severe recession" the country has faced since 2008. The rating organization notes that "positive [economic] growth is not expected to resume until 2011."

5. Vietnam

Like many developing countries, Vietnam's economy has grown despite the financial crisis. But Vietnam's growth slowed in 2009, with GDP rising 5.32 percent, compared with 6.18 percent in 2008.

Weakness in the country's economic infrastructure remains despite reform; many investors remember that in 2007 and 2008, annual inflation rates in Vietnam were more than 25 percent.

A.M. Best places Vietnam in the riskiest of its five tiers. This tier indicates a "legal and business environment with limited or nonexistent capital markets." Vietnam's financial system is particularly troublesome for investors because "cumbersome bureaucracy" and state control in the form of the Ministry of Finance create a "very high" financial risk, according to A.M. Best. It now costs about $240,000 to insure $10 million of Vietnam's sovereign debt over five years.

6. Bahrain

When Dubai, part of the United Arab Emirates, went through a debt crisis at the end of last year, it sent ripples of financial worry through the oil-dependent Middle East.

One country that fell victim to these concerns was the tiny Persian Gulf island nation of Bahrain, where CDS spreads have increased 21 percent over the last three months.

Some of this reaction is simply "guilt by association," as Markit analyst Gavan Nolan has written. But Bahrain also faces some fundamental economic problems because of falling oil prices, which explains why Moody's has a negative outlook on its sovereign debt but not on the UAE's.

Over 60 percent of Bahrain's government revenue and a quarter of its GDP come from oil. Moody's explained in downgrading the country's outlook from stable to negative that, unlike other oil-heavy countries in the region, Bahrain has few liquid assets that the government can use to plug up holes in its budget that are resulting from the oil price decline.

7. Hungary

The global recession hit Eastern and Central Europe very hard, and Hungary has been one of the worst cases in that region.

The economy has improved in the last year, partially because of support from the IMF and the EU and partially because of reforms instituted by the government of Prime Minister Gordon Bajnai, who took office last year. Some of the economic reforms might make Hungary's situation look worse than it really is.

Over the course of 2009, real wages in Hungary dropped nearly 5 percent. Much of this decrease is explained by the government's freeze on wages for public-sector workers. Economists expect Hungary's economy to contract again in 2010. The uncertainty has led Hungary's CDS spreads to fluctuate in recent months, but they have increased more than 17 percent over the past three months.

 

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Global Economy: 7 Countries Spooking Investors | Matthew Bandyk

 

(c) 2010 Matthew Bandyk