US/Japan divergence from Europe highlights G10 risk shift – ECR Q2 2013 results
Among the G10, six countries – all EU member states – became riskier during H1 2013, one (Germany) was unchanged and four (Canada, Japan, Switzerland and the US) became safer.
The G10 grouping of advanced, industrialized countries (11 in total) has become more diverse from a risk perspective since the 2007/08 global crisis erupted, with a record 32.3 points out of a possible 100 now separating top from bottom.
Safe-haven Switzerland – one of the strongest performers on ECR’s global scoreboard and still second only to Norway, the world’s safest sovereign – saw its score increase by 0.7 points to 87.5 during the first half of this year, highlighting its decoupling from Europe’s crisis, strong fiscal metrics and political stability.
Troubled Italy, on the other hand, endured another 1.6 point drop to 55.2 as its political tensions – highlighted at the February elections and by the ensuing coalition-forming – coupled with a lack of economic growth continue to pose challenges to fiscal consolidation. Even without the presumption of policy slippage, and stability in borrowing costs – which remained below 5% during H1 2013 – Italy will still see its general government gross debt burden rise above 130% of GDP this year and climb further in 2014.
Experts have also upgraded North America and Japan. In comparison with the complex politically induced fiscal challenges that afflicted the US toward the end of last year – and which led to fears of a government shutdown – survey contributors have become more confident in the US’s prospects. All five economic assessment factors have improved, notably the economic/GNP outlook, on the back of rising personal credit demand and employment growth.
If the IMF’s latest forecast of 3% real GDP growth for the US in 2014 proves correct, it would be the strongest pace since 2005, further improving the labour market and the fiscal gap. This might in time see the US regaining its place within the top tier of ECR’s sovereigns – it lays one place below in 15th spot.
As one of ECR’s North American experts Johan Krijgsman, of Krijgsman & Associates, says: “The US Federal Reserve has demonstrated flexibility and a willingness to implement the right policies given the circumstances.
“On the fiscal side, I don’t think the measures are sufficient long-term to fix the problems, which ultimately have to be addressed from the political standpoint. And you still have this split in American political opinion as to what the right thing is to do with regards to fiscal policy, and until that gets resolved we will have these bouts of concern and up and downs about US fiscal policy.
“But ultimately, at least the US has taxable capacity left, which is something Europe does not and that will ultimately work in the US’s favour in terms of the exchange rate, its investment profile and the potential for the economy, let alone what is going on with the energy side.”
The first half of this year also saw a 2.5 point score increase for Japan (to 68.0), the largest of any main developed country during the period. Here, too, the amelioration, although bolstered by political stability after the landslide election victory in December for prime minister Shinzo Abe’s Liberal Democratic Party, is similarly economic-related.
Perceptions of growth, the labour market and fiscal situation have all been enhanced after the government’s deliberate policy shift, aided by the central bank’s stimulus measures to boost bank liquidity and depreciate the yen to eradicate years of deflation and moribund growth.
Japan’s 27th-place global ranking is unchanged relative to the first quarter, but the country is five places better off compared with December 2012, highlighting its fight back, having been regarded as the number-one safest country when Euromoney began its regular surveys some 20 years ago.
Canada, too, (eighth on 82.5 points) has also seen its risks continue to ease, partly in response to the improving economy south of the border. Indeed, the entire North American Free Trade Agreement trilateral trading bloc, including Mexico, has seen an improvement in risk this year, which can be partly explained by economic interdependence.
Yet these improvements contrast with other G10 European Union member states, which, with the exception of Germany, have all seen their risks rise since December – even Sweden, which had been an exception to the rule. European economies are once again being buffeted by weakened export markets, harming growth, employment and the public finances.
The UK and France (ranking 19th and 21st globally) are perhaps the most concerning in this regard. With the added risks of political instability and labour relations in France, country-risk experts have downgraded mostly economic indicators – ranging from currency/inflation risk for the UK, arising from pound-sterling depreciation and quantitative easing, to the growth and the employment situation in France causing anxiety for the unpopular socialist president François Hollande, and which are causing fiscal problems for both nations.
Despite recent signs of improvement in the UK economy and the coalition government’s efforts to redress the acute fiscal situation by slashing spending and providing a “supply-side” boost via lower taxation, the general government deficit is forecast to increase to 6.8% of GDP this year and remain above 6% in 2014, with the UK’s gross debt burden escalating to almost 100% of GDP – a third higher than in 2009.
The French deficit, while falling this year, is projected to increase in 2014 back above 4% of GDP, as the government is given more time to reach its programme targets and tackle a debt-to-GDP ratio ascending, seemingly in tandem with the UK, close to the 100% mark. The country’s three-year long negative score trend has continued as a result (see French sovereign risk increases in second quarter).
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