5/5/2013: Things are going according to plan... in Italy & Germany

That euro area 'policy' for dealing with the crisis is working marvelously, yeah?

Source: Euromoney Country Risk
Note: lower ECR score = higher sovereign credit risk

Yes, Italy's bonds are trading at much lower yields, and the country is issuing new debt at lower costs... but how much of that has to do with something / anything that Italian Government has done, as opposed to the overall shifts in markets sentiment / liquidity flows, who knows? One thing is for sure, absent yields changes, Italian fundamentals are getting worse, not better. Ditto, between, for all other 'peripherals'.

20/1/2013: Euromoney Credit Risk Data: Q4 2012

All of the G10 countries, with the notable exception of Sweden, saw their risks rise in 2012, according to the latest results from Euromoney’s Country Risk Survey – and not just because of the problems affecting the debt-ridden euro zone sovereigns.

ECR (Euromoney Country Risk survey data for Q4 2012 is out and the results are quite interesting. Broadly they confirm the risk dynamics traced by the survey through the entire 2012, suggesting that qualitatively little has changed over 12 months to signal the improvements in the global economic environment.  Here are some top-line results:

• Of G10 countries, all but one (Sweden) saw further deterioration in ratings.
• G10 ratings deteriorations were not only driven by the continued euro area crisis, but are also present in the case of Japan, the US, and the UK own dynamics.
• Japan and the US continued "on a downward trend, as various economic and political problems continued to raise alarm bells among economists and country-risk experts regarding their medium-to-long term fiscal viability…"
• "Japan’s crippling debt problems, stunted growth and deflation have seen its score fall to 65.5 out of 100 and to 32nd out of 185 countries surveyed – a new record low, when 20 years ago Asia’s former powerhouse was ranked the world’s safest sovereign."
• US scores were down 1.6 points over 2012 to 74.7. 
• "…The US is far from a substantial risk – it is, after all, the 15th safest sovereign in the world, according to the survey. However, US politics has had a decidedly negative influence on its risk profile – all six of the political risk indicators were downgraded in 2012".
• On December 'deal' reached by the US Congress and the White House: "The two sides in the debate must still find common ground to negotiate $110 billion of spending cuts (the “sequester”) without bringing the US economy to a grinding halt. A budget must be agreed, while raising the $16.4 trillion debt ceiling even further presents another, even more perplexing, question of how to ensure medium-to-long term fiscal sustainability in light of adverse demographics – the weakest of the country’s structural factors, according to the survey."

Realting to two major themes I have been highlighting for some time now:

1. The fallout of the euro area from the global growth & growth environment clusters; and
2. The relative rise in risk quality in the 'Southern' growth clusters, leading to relative convergence in risks between the deteriorating 'North' (advanced economies of the West) and the improving 'South' (the middle income and some emerging economies of Asia-Pacific and Latin America)

we have this:

• "Risk differentials between the G10 and the emerging market regions narrowed by between two and three points in 2012, to 25 points for the Middle East and to 30 points each for Asia and Latin America." This is a notable result, coincident with one major theme in global risk changes that I have highlighted for some time now.
• "Differentials between the eurozone and emerging markets saw even larger shrinkage, highlighting that, although traditional markets are still safer, their comparative advantages have diminished."
• "Some of the emerging markets became safer in 2012: those that were largely decoupled from Europe’s debt problems – growing rapidly in many cases – and with fewer domestic issues." 
• "Latin America saw three distinct patterns emerging. Brazil, Chile and Colombia continued their long-term ascent in the global rankings, despite having their economic scores shaved by a slowdown in China paring back commodity demand. Argentina and Venezuela struggled with their domestic crises, which caused both countries to slide further down the rankings. Mexico, Peru, Uruguay and Bolivia all emerged on the radar, benefiting from strong policy management, good growth and other factors."

A special place in the risk rankings 'hell', however is reserved for the euro area:

• "Eurozone countries, …saw shrinking levels of confidence as Slovenia, Cyprus, Spain and Italy endured the largest falls in country risk scores of any of the countries surveyed worldwide, weighed down by creaking banks, rising debts, contracting economies, and the political and structural dimensions to the crisis."
• "The eurozone score fell by 3.1 points, the largest drop of any of the main geographical or economic regions."
• In the case of largest downgrades within the euro area: "All four saw their risks continue to rise during the fourth quarter, despite some progress in tackling their fiscal problems. Bond yields fell and credit default swap (CDS) spreads tightened, suggesting the risks had eased, but ECR has had reason to doubt CDS signalling." Which is the theme consistent with my analysis of CDS in the past.
• Of the peripherals: "Italy, down 14 places in the global rankings this year (to 51st place), Spain (an 18-place faller to 58th), Cyprus (down 11 to 42) and Slovenia (plunging 15 places to 37th) all failed to convince country-risk experts that the worst of the crisis was over."
• The crisis is now perceived to have spread from purely financial and fiscal dimensions to political and structural: "The systemic banking sector and sovereign debt problems stretching across the single currency area have invariably influenced economic risk assessments. However, the political and structural elements to the crisis have resulted in broadly equivalent falls in scores for each of the three measures of risk, on a euro-wide basis."

• On ECB actions: "...in the absence of growth and amid justifiable concerns about the political commitment to budget consolidation and reform – highlighting the risks of policy execution failure – fiscal projections have proved wildly optimistic, deferring the prospect of outright debt reduction for many countries." In other words, while ECB can talk as much as it wants (OMT, the inevitability of the euro etc), end-game is set by real actions. And these are now increasingly in question.
• "Peripheral country risk remains high, even in Greece, which has seen its ECR score stabilize this year, yet on a score of just 34 points and languishing in 110th place on the ECR scoreboard, the country’s problems are far from over… All of Greece’s economic and political factors, 11 in all, score less than five out of 10 as another future debt rescheduling looms. The much-feared Grexit is still not out of the question either, although the markets have been calmed by the progress achieved to date."
• "Debt resolution programmes in Spain, France and other countries are all being questioned."

You can see (subscribers only) the data and play with interactive charts and maps here and the overall site for the data is www.euromoneycountryrisk.com.