The eurozone crisis continues to blight the country risk profile of the continent as a whole.
Europe has suffered a 1.1 point fall in its average survey score during the last six months (to 72.2). However, this deterioration is considerably less steep than the 4.6 point drop which occurred during the second half of last year, suggesting that the shock impact of the eurozone crisis has been previously factored in by ECR contributors.
Indeed, ECR score downgrades occurred before the latest credit rating downgrades by Fitch (to Greece in May and Spain in June), S&P (Spain in May) and Moody’s (Greece, Spain and Malta in June, and Italy in June and July). It suggests there is more predictive value to ECR scores in assessing the direction of risk than credit ratings can provide.
Greece remains by far the riskiest country in the European Union (EU) in 1H 2012, with a country risk score of 34.4, less than half the regional average. Greece, with its acute borrowing risks, dire economy – in recession since 2008 – and lack of market access, has now experienced the largest fall in the ECR rankings since the survey was first compiled in March 1993. Surprisingly, the country experienced a slight rebound during the last six months, climbing six places in the rankings to 109th overall. The partial rebound comes in the wake of a tortured, but ultimately successful, election process which, for now, has prevented a catastrophic Greek euro exit.
The debt crisis has also led to further falls in the rest of the eurozone periphery, in Italy, Spain and Portugal, whose risk scores had declined sharply to record lows last year. Further – but smaller – declines have taken place in each country during the last six months, taking those countries further away from the European average, as a toxic mix of deteriorating economic outlooks, creaking financial systems and structural problems has eroded economists’ confidence in the region.
Italy and Portugal slipped furthest in the rankings in 1H 2012, by four places each, while Spain is down by three. On a comparative global basis, Italy (in 41st position) and Spain (42nd) are now considered riskier than China, the United Arab Emirates and Colombia, which have all moved above the two sovereigns this year – plus Brazil in Italy’s case. Portugal (now at 65) has slipped below Uruguay, Costa Rica and Bulgaria.
Italy and Spain have seen their ECR scores decline in tandem by 15.1 and 13.5 points respectively since 2010. These falls are commensurate with elevated 10-year government bond yield spreads to Germany, at 4.7 and 5.7 percentage points respectively on July 17.
However, although Spain’s nominal 10-year bond yield has risen this year – from 5% to 6.7% – highlighting the country’s financing problems, Italy’s has fallen back from the 7% highs seen at the start of the year, to 6.2%. Yet its ECR risk score has continued to fall, suggesting that ECR contributors perceive there to be greater overall risks attached to Italy than its bond-yield fluctuations can explain.
The movements in credit default swaps – the cost of insuring against a debt default – have moved more in synchronicity with ECR scores, rising in both cases from 311 basis points to 566bp for Spain and from 480bp to 508bp for Italy during the last six months, according to Markit, the financial information services company.
They endorse ECR score shifts, which highlight a degree of scepticism and uncertainty over the ability of the eurozone’s latest bank bailout agreement to resolve the region’s problems. The new plan supposedly grants the use of contingency funds to recapitalize banks without adding to sovereign debt, but is not expected to be fully operational until a Europe-wide banking regulator is inaugurated, despite the apparent urgency of Spanish banks’ borrowing needs.
A make-shift plan to drip-feed financial assistance and grant Spain an additional year to meet its budget-deficit targets is in process, but the economy is in deep decline. And, as can be seen from their correlated score declines, the problems in Spain are invariably affecting Italian risk perceptions, too.