ECR Survey Results Q3 2012: Spain the world’s worst performer in Q3 as eurozone continues to decline
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ECR Survey Results Q3 2012: Spain the world’s worst performer in Q3 as eurozone continues to decline

The eurozone became even riskier in Q3 2012, according to the results of Euromoney’s Country Risk (ECR) survey. Spain, the world’s worst performer in the survey during that period, plummeted 14 places, while Italy and Slovenia registered increased risk too. Core economies Germany and France also got riskier in Q3, according to economists. However, there were signs that the worst might be over for the eurozone as a whole, with its average score deterioration slowing to 0.5 points on average in Q3, less than a third of the previous quarter’s fall.

Spain saw the largest increase in risk in both the eurozone and the world in the ECR survey for the period June to September 2012, as solvency fears, a crisis budget and a make-or-break audit on the domestic banking system played into experts’ increased perceptions of risk.

The country slipped 14 places in Q3, as its overall ECR score deteriorated by four points out of 100 to 54.9. Spain is now ranked third amongst the zone’s riskiest sovereigns, behind Greece and Portugal. 

Source: Euromoney Country Risk. All scores as of October 1, 2012. Score guide: 100=safest, 0= riskiest. Tiers: 1=safest, 5=riskiest. 

The data show that Spain suffered from a much sharper score decline this quarter, from the levels recorded in Q2, when it fell by just three places. Spain also performed far worse in the Q3 survey than fellow eurozone struggler Italy, whose score fell by just one point (out of 100), leaving the country ranked 45th-safest sovereign globally.

Although the government’s recently agreed crisis budget has brought some positive steps, including greater efforts by the government to impose itself on local authorities in the country’s many autonomous regions, analysts remain cautious about the prospects for economic recovery. Spain’s economy is now expected to contract by 3.7% in 2012, according to the IMF.

The crisis has forced ECR analysts participating in the survey to lower their growth forecasts for the country, which in turn has caused a downward pressure on government financing and public debt.

These trends are reflected in ECR data, which shows Spain’s economic risk score saw a sharp nominal decline in Q3. Spain’s economic assessment scores fell by -0.8 points during the period, after the country received reduced scores across most of the survey’s economic indicators, including government finances, economic outlook and bank stability.

A recent report by survey contributors ABN Amro states: “The government has based its budget on rather optimistic projections for the Spanish economy. It expects GDP to contract by merely 0.5% in 2013, while we think a much sharper decline is more likely – our current estimate is -1.9%. Consequently, it seems very likely that the government will miss its deficit target next year, unless it implements further austerity measures.”

ECR analysts appear to be most concerned about the country’s prospects for growth and the fragility of Spain’s banking sector in Q3. Spain’s banking-stability indicator saw the largest deterioration among the country’s economic sub-factor scores, falling by 0.7 points to 3.6 Q/Q, while the country’s economic outlook indicator fell by 0.5 points to 3.1 in Q3 2012.

Signs of stabilization elsewhere in periphery

Excluding Spain, a number of peripheral eurozone economies registered a smaller deterioration in Q3 than in the previous quarter, while several became safer – a sign that concerted efforts by the European Central Bank and national governments to ease credit conditions in afflicted states might be beginning to have a positive effect.

However, in absolute terms, risk is still increasing across much of the zone: Italy fell four places to 45th, while Slovenia (34) and Cyprus (38) each slipped three places in the rankings. 


Italy’s debt problems are reflected in ECR data, which shows that the country’s overall ECR score deteriorated further this quarter, falling by 1.1 points. The score decline is lower than the 4.3 point deterioration which took place in Q2 2012.

Since then, Italy has managed to shrug off suggestions it might require a sovereign bailout, after the country’s borrowing costs receded from July onwards, providing a window for Italy to issue €2.25 billion in sovereign bonds in October.

However, the sovereign continues to be perceived as high risk by analysts participating in the ECR survey. Italy’s falling position in the third tier of the ECR rankings has made it the riskiest G-10 nation and the fifth-riskiest economy in the eurozone, with a lower country risk score than South Africa, Iceland and Mexico.

Ireland’s reforms progress

Ireland saw an improvement in its overall ECR score in Q3, fostering hopes that the worst of the country’s crippling economic crisis might now be behind it. Ireland’s return to the bond market in July is thought to have spurred investor confidence in the country after it raised more than €5 billion, while continuing to make progress on its EU-IMF programme commitments.

“This achievement, despite Ireland’s still-rising public debt, underlines investor confidence in Ireland’s capacity to implement adjustment policies as well as market expectations of European support for Ireland,” reports an IMF press release.

The IMF projects an optimistic outlook on Ireland’s gradual economic recovery, after a visit to Dublin in October for the eighth review of the government’s economic programme. A press release by the IMF reported that “policy implementation remains steadfast, despite the challenging external environment, helping Ireland to start to regain market access. It is expected that fiscal targets for 2012 will be met. Revenues remain ahead of profile in the first three quarters of 2012.”

This is reflected in ECR data, which points to Ireland’s risk rising by 0.4 points Q/Q, with improvements across the sovereign’s economic and political risk scores, each improving by 0.1 and 0.3 respectively. In addition, Ireland’s Access to Capital Markets (ATCM) indicator improved by 0.3 points, reflective of the country’s successful return to the bond markets. 


However, Constantin Gurdgiev, lecturer at Trinity College, Dublin, and a member of ECR’s expert panel, notes the challenging road that lies ahead for the Irish government in addressing the reforms in the banking and financial sectors.

“To resolve the legacy problems of the sector insolvency, the government must force the banks to undertake aggressive deleveraging out of the household assets, including systemic mortgages writedowns,” he says. “As a part of such approach, the government should aim to break up the larger insolvent banks and purge their balance sheets of risky assets. The government must also actively pursue the policy of enhancing, not restricting, competition in the banking services in Ireland.”

These improvements have left Ireland as the second-safest peripheral economy, after Italy (see exhibit 1 above).

Greece saw its overall risk assessment stabilize in Q3, after the government gained approval in parliament to push ahead with further austerity measures. However, it still remains far adrift of other euro participants on a score of 34.4, half the eurozone average and with a rank of 116 globally, leaving it far off investment-grade status.

Michalis Vassiliadis, research associate at Foundation for Economic and Industrial Research, and a member of ECR’s expert panel, says: “The election in May/June brought more certainty for Greece’s commitments to the EU and official lenders. The government’s announcement that it would keep up the fiscal consolidation efforts and to co-operate with lenders has removed pre-election uncertainty.”

Portugal’s challenges

Portugal also became safer in Q3 2012, albeit by a slim margin (0.8 points out of 100). Survey scores for bank stability, government finances and institutional risk improved during the quarter, as the government continued to push ahead with its bailout-programme commitments.

However, Portugal’s risk perception still remains high. Ranked 65 globally in the ECR rankings, the sovereign continues to be inflicted by a high debt burden and low rates of real GDP growth. Portugal’s ECR score of 50.8 points has left it 16.8 points adrift from the EU average, suggesting that the sovereign’s position in tier three remains highly vulnerable.

Accounting for the diverging trends of the periphery, Sylvain Broyer, economist at Natixis and an ECR expert member, says: “In the periphery there is no domestic recovery, but there is a more balanced picture than three months ago. Real compensation and hourly wages are going back up but the problem is the average number of working hours is still declining between -1% to -3%.

“There has also been a huge price adjustment in Ireland and Portugal, so the fruits of the structural reforms engaged in these two economies are growing faster than in Spain or Italy. The rigidities of the labour market will continue to be a problem in Spain and Italy, and this is why you see a divergence in the performance of the periphery economies.”

Fragility at the core: Germany’s risk score weakens

The Eurozone’s core economies became riskier in Q3, with ECR analysts downgrading ECR scores for Luxembourg, Germany, Netherlands, Austria and France.

Germany saw the largest deterioration in its country risk score among the core euro-zone economies. The sovereign’s ECR score fell by 0.4 points to 81.8 in Q3 2012, after remaining unchanged between Q1-Q2. Of most concern to ECR analysts were the countries economic outlook and government stability indicators, which each fell by 0.1 points in the quarter. The IMF forecasts growth of just 0.7% in Germany in 2012.

According to Sylvain Broyer, “the German economy will stagnate in the second half of this year. Correspondingly, the growth prospects for next year, are lower than they were 6 months ago. We are seeing a slowdown in Germany and in EU exports, as the world economy is slowing down rapidly; world trade is only growing 1% a year, so for Germany it means a major set-back.”

The Euro’s second largest economy, France, saw its ECR score revised downwards again this quarter. France’s risk outlook has continued on a downward trend this quarter, with its ECR score falling by 0.1 points to 73.7. Although this is a much smaller quarterly decline than the 2 point drop between Q1 and Q2 2012, the sovereign’s ECR score has been declining steadily over the past year.

France’s economic assessment, took the worst hit, deteriorating by 0.7 points, after the country received reduced scores across its government finances, employment and economic outlook indicators. The sovereign’s political assessment score marginally rose by 0.1 points, after the election of Francois Hollande back in June May 2012.

Concerns are also mounting in France, that the government will face heavy domestic opposition from small businesses and financiers, over its fiscal budget; after the government unveiled a new set of tax hikes, placing a 75 per cent income tax band on earners over a certain benchmark. Such a move will likely dissuade investors from setting up in France, as a growing proportion of the French population decide to emigrate.

As we noted in a recent post, (ECR gauges French risk, not bond yields or CDS spreads),  France is western Europe’s fifth worst performer during the past six months – behind Italy, Malta, Spain and Portugal. However, it has traded places with the UK in the ECR rankings this quarter, as the sovereign’s position improved by one position, to 18th place in the ECR rankings. But this improvement has more to do with other countries around it becoming more risky, rather than France’s economic metrics improving.

Cyril Regnat, fixed income strategist at Natixis, says: “The budget’s recent announcements are a step in the right direction to cope with France’s structural lack of competitiveness but unfortunately all these reforms will weigh on French growth. The budget should add to the adjustments needed, spurring greater competitiveness in the long term and resilience in the short term. However, on the downside, this means that it will be difficult for France to reach its 3% deficit reduction targets by next year.”

This article was originally published by Euromoney Country Risk.

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