US and Japan pull away from Europe freefall: ECR Q1 2013


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Five of the 11 G10 countries became safer in Q1, but six European countries got riskier.

What a difference a quarter makes. After a long period of falling scores, the G10 group of leading industrialized economies has seen a recovery of sorts in the first months of this year.

Partly, this highlights a lifting of the gloom surrounding the US. The world’s largest economy saw a 0.6 point improvement in its score to 75.3 points during Q1 2013, retracing the ground lost during the final months of last year, though it remains in 15th spot in Euromoney’s global rankings, with barely a point separating it from Chile, Latin America’s safest sovereign, still one place below.

The latest employment report has aroused concerns about the durability of the US economy. However, the country’s continuing growth – contrasting with the deep recessions afflicting many parts of Europe – and a papering over of the fiscal cracks that dominated the headlines late last year (and which sparked fears of a government shutdown) have encouraged the survey’s US contributors to adopt a more positive tone.

Confidence in Japan has also returned. The country had hitherto endured a catastrophic descent in Euromoney’s 186-nation rankings since it was perceived to be the world’s safest sovereign when the survey was launched 20 years ago.

However, Japan’s 2.3 point rise in Q1 2013, to 67.8 out of 100, is signalling an improvement in confidence in the wake of the policy shift taken by the new government of Abe, assisted by new Bank of Japan (central bank) governor Haruhiko Kuroda.

The three-pronged policy approach, involving fiscal and monetary stimulus, and structural reforms – including deregulation to spur investment – might be just the right approach required for the country to stage a comeback, according to risk experts.

As Ieisha Montgomery, associate international economist at the Northern Trust Company and one of ECR’s 22 Japanese experts, states: “The Japanese economy has started to move in the right direction [thanks to] bold monetary action, some moves on the fiscal side and addressing some of the structural issues.”

Although the amelioration in Japan’s score might seem counterintuitive in light of the increased fiscal spending associated with the government’s economic programme, the deliberate attempt to revive the economy and target 2% inflation via a massive quantitative easing programme – a doubling of the base money supply – is a bold plan with undoubted merits given the sclerotic nature of its ailments.

Furthermore, Montgomery claims: “The fiscal stimulus package will not have a major impact on the country’s public finances, as a lot of that was already budgeted for and a lot is still going into the reconstruction of the Tohoku region, which has been progressing slower than expected.”

Expectations might take time to adapt to rising prices, too. However, if Abenomics attains credibility it will have done so because it has encouraged cautious households to reduce their savings and spend more.

The yen depreciation, too, will provide a fillip to Japanese exporters, boosting foreign demand and overseas profits, and reversing almost two decades of moribund growth, deflation and structural deficit financing that has held the country back, but has not had a particularly detrimental effect on its borrowing costs.

The improvement in several risk indicators, not least for government finances and government stability during the quarter, has boosted Japan’s credentials and put a stop to the sovereign’s score from converging completely with China. Euromoney recently demonstrated that this long-term trend derives mostly from sliding confidence in Japan.

Now a more comfortable tier-two sovereign out of five tiered groups into which 186 countries are divided, Japan has climbed to 27th in the global rankings, leapfrogging declining South Korea, Malta and Israel in the process, and with Oman, Slovakia, Estonia and the Czech Republic back in its sights.

Yet, despite the improvement, Japan is still one of the riskiest G10 nations, beaten only by Italy for the wooden spoon among the 11 (confusingly, not 10) constituent nations.

The sovereign has a long way to go, though, to restore its image of safety, as declining year-on-year scores for bank stability, the employment/unemployment situation, and the majority of its political and structural factors, underline.

One of the main risks for Japan, according to Montgomery, is that “[policy] announcements made last week could lead to a rapid depreciation in the yen, which is something [the government] would want to avoid”.

Meanwhile, at the top end of the G10 scale is safe-haven Switzerland, having reclaimed pole position from Sweden on a small rise to 87.3 points. This puts it just 2.3 points behind ultra-safe Norway, still the world’s safest investor location, with tiny-fortress Luxembourg in third.

However, the easing of G10 risks is tentative and skewed towards non-European sovereigns. Take Japan out of the equation and the G10 would have had another small, average score decline during the quarter, highlighting the powerful downward pull from Europe’s financial crisis.

Barring Sweden and Germany, which remain among the safer sovereigns in the European Union, the region’s other leading industrialized economies – the Netherlands, down one place to 10th, the UK and France, still treading water at 19th and 20th respectively, Belgium down to 22nd and Italy, slumping to 55th, its lowest point – have all influenced the G10’s fortunes, as concerns about their fiscal problems, their growth prospects and bank stability all dominate experts’ risk perceptions.

Italy’s plight means the dispersion of scores between the safest and riskiest G10 members has increased to 32.1 points, its largest disparity yet and highlighting the lack of risk-uniformity in advanced industrialized countries compared with the past.