Britain ranks below Peru in new ‘sovereign risk’ world order

Peru: not as risky as Britain

Britain ranks below Peru in a new analysis by one of the world’s biggest fund managers of the risk to investors who buy government bonds. Norway, Sweden and Switzerland are the least risky bond issuers among 44 countries analysed in the BlackRock Sovereign Risk Index. At the other end of the scale, also in descending order, Egypt, Portugal and Greece are reckoned to be the most risky.

Britain falls near the middle of this new world order, ranking directly below Russia, China, Czech Republic, Israel and Peru. Some small comfort may be taken from the fact that gilts issued by the British Government are reckoned to be a better bet than bonds issued by France, the Philipines and Poland; which rank directly below Britain.

Dissatisfaction with credit rating agencies such as Standard & Poor’s, Fitch and Moody’s – which have issued nearly 100 sovereign risk downgrades since the global credit crisis began – prompted BlackRock to begin collating its own analysts’ views earlier this year. It claims back-testing of this analysis suggests it is more accurate than the credit rating agencies’ and that the current crisis will continue with more government’s getting into trouble with excess debt.

Benjamin Brodsky, managing director of fixed interest at BlackRock said: “Our initial analysis was judgmentally based, and contemporaneously validated by a high correlation with sovereign credit default swap (CDS) market spreads. Over recent months we have constructed the back history of this approach running from, taking care to use ‘real-time’ data.

“In this quarterly update for the index, we complement our earlier analysis, showing how the BlackRock Sovereign Risk Index (BSRI) has outperformed both ratings agencies and sovereign credit default swap spreads in highlighting downgrade risks.

“Considering heightened activity within the Eurozone periphery in recent years, we present a case study that focuses on Greece, Ireland, Italy, Spain, and Portugal. We show how the BSRI would have led agency activity over the span of these countries, while leading markets in their shift from complacency.”

As independent analysis from the Centre for Economics and Business Research suggests Britain might be better off if the eurozone breaks up, Ewen Cameron Watt, managing director of investment strategy at BlackRock, said: “Driven by multiple fundamental insights to the nature of sovereign credit risk, the BSRI presents a useful tool for profiling the strengths and weaknesses of countries against one another.

“Our research suggests these insights can lead rating agency activity, with an excellent track record at preceding downgrades, and historically would have highlighted areas of market complacency.

“As a backdrop for the future, we believe the multi-decade compilation of sovereign and banking crises by Reinhart and Rogoff presents a compelling case that in recent years financial markets have been complacent about risks that have always been present and, as more countries approach their upper limits of sustainable leverage, a return to a higher incidence of crises seems likely.”

A fundamental shift of economic wealth from West to East is underway and relative valuations of international bonds reflect that transition. Mark Dampier of wealth managers Hargreaves Lansdown put it most succinctly: “The emerging markets have the savings; the developed world has the debt. Sooner or later, prices will reflect those facts.”