Moody’s Investors Service put the credit ratings of the UK, France and Austria on negative outlook on Monday night, citing the weaker macroeconomic environment in the eurozone as the main challenge facing the affected governments’ efforts to reduce debt levels during the coming years.
The move follows the decision by Fitch to downgrade six eurozone sovereigns in January and S&P’s downgrade of nine sovereigns earlier in the month. It marks the first time the UK has had its AAA rating threatened since the beginning of the eurozone crisis.
However, in Euromoney’s country risk survey, the UK’s risk score had been in decline for four consecutive quarters before the agency’s action due to economists’ worsening opinion of its risk outlook across a range of economic, political and structural criteria.
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Core eurozone sovereigns and the UK country risk scores, 2008-2012 |
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| Source: ECR |
The UK has fallen to 19th place in Euromoney’s global rankings from 11th in March 2008, with a score reduction of 15.9 out of 100 (an ECR score of 100 equals no risk, while a score of 0 equals maximum risk). The score decline means the UK’s overall country risk score is 10 points lower out of a possible 100 than the average score for AAA sovereigns.
The UK has consistently received lower risk scores than its eurozone counterparts across a range of economic, political and structural criteria (see chart 1). As of February 10, eurozone states including France, Germany, Austria and the Netherlands all retain higher (ie less risky) scores than the UK. The UK also ranks below emerging markets including Chile and Taiwan in the rankings.
Among the survey’s 15 country risk indicators, the UK receives lower scores than France for bank stability, economic outlook, employment, monetary policy/currency stability and government finances. The UK also receives a lower score in ECR’s debt indicators metric than France due to its higher government debt/GDP ratio.
During the fourth quarter of 2011, the UK received declining scores for economic, political and structural risk. Its scores in the bank stability, government finances and employment indicators declined at a faster rate than the average score for eurozone sovereigns.
Scores for both Austria and France have deteriorated by 2.4 and 4.8 points out of 100 since the first quarter of 2011, with both countries falling by one place in the ECR rankings during the period.
Rating agencies behind the curve
The UK is not the only sovereign to be downgraded long after experiencing a decline in its country risk outlook. Data from ECR illustrate that economists’ perceptions of the risk present in core euro-member states started to deteriorate more than three years before the rating agencies finally acted.
As chart 2 shows, Italy’s country risk score declined by more than 15 points between September 2008 and October 2011, reflecting the economic deterioration that took place in the country during this period. Italy retained an AA- credit rating from Fitch until October 2011.
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Italy – Fitch rating vs country risk score |
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| Source: ECR, Fitch |
Spain retained its AA+ rating from Fitch until October 2011, when it was downgraded to AA-. The country had seen its country risk score deteriorate by more than 20 points since September 2008, after the country’s banking crisis and a swing in the general government balance from a surplus of 2% of GDP in 2007 to a deficit of 11.2% of GDP in 2009.
| Spain – Fitch rating vs country risk score |
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| Source: ECR, Fitch |
Fitch downgraded Belgium in January for the first time during the eurozone crisis, to AA from AA+. Already saddled with high levels of government debt, the country has been gripped by a political crisis and has seen state-sponsored lender Dexia require a joint bailout by the French and German governments in October 2011. Between September 2008 and January 2012, Belgium’s ECR score declined by more than 15 points, leaving the country ranked 21st globally.
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Belgium – Fitch rating vs country risk score |
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| Source: ECR, Fitch |
Methodology
Euromoney Country Risk evaluates the investment risk of a country across 15 criteria, such as risk of default on a bond, risk of losing direct investment and risk to global business relations, by polling noted international economists. This qualitative score is averaged and combined with three basic quantitative values to give a score on a 100-point scale, where 100 is safest and 0 most risky. Over 400 economists participate in the survey, assigning a score to 186 countries globally.
To find out more, visit www.euromoneycountryrisk.com.
