When looking around the world and at the state of various economies it quickly becomes apparent that some sovereign debt is more risky than others.
So, how does the investor get an idea of which is the best to invest in?
Well, BlackRock’s quarterly report (https://www2.blackrock.com/webcore/litService/search/getDocument.seam?venue=PUB_IND&source=GLOBAL&contentId=1111157859) into the sovereign debt of 44 countries draws on quantitative financial data, as well as more qualitative data from surveys and political insights then ranks the countries for you.
The BlackRock Sovereign Risk Index (BSRI) does come with a health warning on its first page though due to the irregularity of the data collection and it does say it is not a forecasting vehicle.
During the last quarter of 2011 the biggest risers on the BSRI were Japan (up five places) with China, Peru and Poland all moving up three places. Japan benefitted from the view that its government had improved its ‘stability and effectiveness’, as had Poland.
The fallers were led by Thailand (down six places), whose drop was triggered by severe flooding causing ‘deterioration across the board’. France fell four places due to a ‘worsening investor climate and political risk’. South Africa also fell three places due to its widening primary budget deficit.
The UK is mid rank in 23rd.
Countries are ranked in order of sovereign debt as follows:
The final BSRI ranking is derived from four categories: Fiscal space (GDP, debt, tax, demographic and dependency ratios), willingness to pay (government’s effectiveness, stability and lack of corruption), external finance (current account balance and exposure to foreign debt) and financial sector health (banking sector strength and credit bubble formation risk).