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 European Macroeconomics & GovernanceGlobal Economics & Governance Tags & Topics

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.

View comments
Read article Download PDF More on this topic

Policy Contribution

PC 12 2017COVER2

The global decline in the labour income share: is capital the answer to Germany’s current account surplus?

Analysing the major divergences between the three largest euro-area countries in terms of unit labour costs and current accounts, to the broader debate on labour income shares. Data suggests that capital and labour have been complements.

By: Bennet Berger and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 26, 2017
Read article More on this topic More by this author

Opinion

Marek Dabrowski

What are China’s global economic intentions?

At this January's Davos meeting, Chinese President Xi Jinping announced to a surprised audience that China would be the world’s new champion of globalisation. Bruegel scholar Marek Dabwoski agrees that a functioning global trade system is in China's interest.

By: Marek Dabrowski Topic: Global Economics & Governance Date: April 25, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

The decline of the labour share of income

What’s at stake: at odds with the conventional wisdom of constant factor shares, the portion of national income accruing to labour has been trending downward in the last three decades. This phenomenon has been linked to globalisation as well as to the change in the technological landscape - particularly “robotisation”. We review the recent literature on this issue.

By: Silvia Merler Topic: Global Economics & Governance Date: April 24, 2017
Read article Download PDF More by this author

Working Paper

Cover WP 2017_06

Regional and global financial safety nets: the recent European experience and its implications for regional cooperation in Asia

Comparing and evaluating financial assistance programmes of four euro-area countries (Greece, Ireland, Portugal, and Cyprus) and three non-euro-area countries (Hungary, Latvia, and Romania) of the European Union in the aftermath of the 2007/08 global financial and economic crisis. Asian countries can draw several lessons from European experiences.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance Date: April 20, 2017
Read article More on this topic More by this author

Podcast

Podcast

Labour mobility in Europe

With anti-immigration sentiment on the rise, we look into the issue of labour mobility in Europe. How does migration affect labour markets and how does perception of migration differ from reality? What are the economic challenges for migrants and how do these challenges reflect on social integration? We try to answer these questions with our guests in this episode of The Sound of Economics.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: April 20, 2017
Read article More on this topic More by this author

Blog Post

André Sapir

Trump’s U-turn on trade with China is good news, but the EU should not be complacent

President Trump has so far been softer on China than his campaign promises predicted. This is welcome. However, the EU has a lot at stake, and should be ready to steer a tactical course between its two main trade partners.

By: André Sapir Topic: Global Economics & Governance Date: April 19, 2017
Read about event More on this topic

Past Event

Past Event

Understanding the French elections

This is a restricted workshop on the forthcoming French elections to understand the challenges and possible scenarios.

Speakers: Grégory Claeys, Thomas Guénolé-Ryzhakov, Bruno Jeanbart and Guillaume Tusseau Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 19, 2017
Read about event

Upcoming Event

May
30
11:00

Geo-blocking in the digital single market

Geo-blocking is a discriminatory practice that is wide-spread in EU. It prevents online customers from accessing and purchasing products or services from a website based in another member state

Speakers: Felipe Florez Duncan, Marine Elgrichi, J. Scott Marcus, Fabian Paagman, Bertin Martens, Georgios Petropoulos, Agustin Reyna, Werner Stengg and Roza von Thun Topic: European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event

Upcoming Event

May
31
12:30

Inclusive growth: global and European lessons for Spain

Can manufacturing still be a driver for inclusive growth around the world? What European and national policies can foster inclusive growth in Europe? What is the situation in Spain and what can Spain learn from the global and European experiences?

Speakers: Cristina Cabrera, Zsolt Darvas, Maria Demertzis, Alejandra Kindelán, Robert Lawrence and Federico Steinberg Topic: European Macroeconomics & Governance, Global Economics & Governance Location: Calle Los Madrazo 36-38 Madrid
Read about event More on this topic

Past Event

Past Event

Global outlook and policy priorities

At this event the Managing Director of the International Monetary Fund, Christine Lagarde, will speak about the global outlook and policy priorities, ahead of the 2017 IMF Spring Meetings

Speakers: Christine Lagarde, Jean-Claude Trichet and Guntram B. Wolff Topic: Global Economics & Governance Location: Brussels Date: April 12, 2017
Read article More on this topic More by this author

Blog Post

Lagarde picture

Building a more resilient and inclusive global economy

Curtain raiser speech ahead of the 2017 IMF Spring Meetings delivered at Bruegel by the Managing Director of the International Monetary Fund.

By: Christine Lagarde Topic: Global Economics & Governance Date: April 12, 2017
Read about event More on this topic

Past Event

Past Event

Towards EU-MENA shared prosperity

The second edition of the "Platform for Advanced & Emerging Economies Policy Dialogue" will discuss global supply chains, energy and security.

Speakers: Abdelhak Bassou, Jean-Francois Dauphin, Maria Demertzis, Karim El Aynaoui, Larbi Jaidi, Marion Jansen, Giacomo Luciani, Rania Al-Mashat, Iverna McGowan, Jolana Mungengová, Francis Perrin, Francesco Presicce, Simone Tagliapietra, Valeria Talbot and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 10, 2017
Load more posts