G10 risk perceptions increase dramatically in Q3 2012

Jeremy Weltman
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G10 has become riskier during the third quarter; Sweden is safer, according to Euromoney Country Risk Q3 results.

All of the G10 member states, except for Belgium and Sweden, have seen a fall in their ECR scores during Q3 2012, giving an average score decline of -0.6 (out of 100), and -1.4 since the beginning of this year. However, Japan is not the only concern.

Eight other countries have experienced score downgrades during the quarter, with Italy (a fall of 1.1 point, taking the country down to 45 in the rankings), Canada (-0.9, down one to 8), the UK (-0.7, also down one to 19) among the worst.

For some countries, including the UK and Germany, political and structural factors provide part of the explanation, but they all share one thing in common: a downgraded economic assessment, highlighting diminishing faith in the global economic outlook, linked to the unresolved eurozone debt crisis, lingering bank-stability issues and China’s demand-adjustment.

The US and Canada, though still among the safer investment locations in the world, have succumbed to score downgrades during Q3 2012, continuing a two-year trend.

The US, which ranks lower than Canada, has seen its score fall from 82.1 to 75.3 since September 2010. US election uncertainty is playing a dominant role, particularly in view of the contrasting fiscal policy priorities of the two parties to deal with the considerable budget deficit.

Still, Canada (up one place in the rankings this year, to eighth) and the US (steady at 15th) remain comparatively safe-portfolio options in contrast to other parts of the world, not least because their highly advanced institutions and infrastructures support high scores for many economic, political and structural factors.

Overall, on a score of 88.2, Switzerland is still the safest G10 country, lying in second place on ECR’s global scale, just below hydrocarbons-rich Norway – still the world’s safest sovereign. Switzerland’s elevated position is nonetheless coming under threat from Sweden, an EU member state lying outside the eurozone and similarly rated Aaa by the three main ratings agencies (Fitch, Moody’s and S&P).

Although, as with other countries, Sweden is being buffeted by weaker export markets, its political stability, robust banking system and strong policymaking attributes are all factors supporting its low-risk credentials. And with enviable fiscal metrics to boot, the gap between Sweden and Switzerland is now at its narrowest.

Sweden was the 16th safest sovereign in the world in 1993, but is now the fifth safest after a two-place jump this year. The country’s monetary independence is as much a reason for its improving score as its strong fiscal policy management, according to one of ECR’s contributors, Anna Lidberg, an economist at Sveriges Riksbank, the Swedish central bank, who states: "At the beginning of the year, we [eased] monetary policy twice and also in September of last year. This decreased the interest rates passing on to households and firms, improving sentiment.

"This has allowed Sweden to sit fairly well in comparison to its Nordic counterparts. In Denmark, monetary policy has to follow the eurozone, so they have to defend their currency, while [Sweden] can concentrate on [its] public debt. Denmark is also having problems with [its] banking sector, which is not as bad in Sweden."