Country risk March 2005: As spreads tighten the world gets riskier

Methodology | Country risk results

IN A YEAR in which sovereign credit ratings upgrades continued to outpace sovereign downgrades, according to Standard & Poor's, there has also been a further narrowing of spreads in emerging countries' issues or credits. S&P upgraded 28 sovereigns in 2004 and lowered the rating on only seven. This upward trend looks to continue into the first part of 2005.

In our September 2004 survey we reported an aggregate upward shift in the total absolute risk score for all 185 countries rated of 4.5%. This time however, despite sovereign upgrades, there has been a decrease of 3.5% in the overall ratings this half year. This can be attributed to geopolitical instability in the Middle East and Africa.

Underpricing credit fundamentals

According to Francis Nicollas at Crédit Agricole, there has been a "sharp decrease in the price of risk worldwide". He attributes this partly to the "exceptional liquidity of the international financial market, and also the search for spread (because of the low interest rate in the US)". He notes: "One of the consequences is that we can ponder the future of the external financing needs for the countries that need these inflows badly (such as Brazil [68] and Turkey [73]) if the investor appetite for that kind of risk decreased or even vanished".