Country risk: European sovereigns still among safest

In light of the eurozone’s increased risk aversion, it is interesting to note that the majority of the world’s safest sovereign countries are in Europe, four of which are also single-currency users (Luxembourg, Finland, the Netherlands and Germany).

Germany, with its two-place jump since January, has joined an elite group of ‘safe’ sovereigns based on ECR scores. Rock-solid Norway  – neither a eurozone participant, nor an EU member - retains its status as the safest global sovereign, while Switzerland – now in second place – has dislodged Singapore into third. Canada, the only other non-European country in the list, has moved up two places, to seventh.

Denmark’s top 10 billing might be about to be tested. The country has fallen the most since January, despite attracting inward capital as a eurozone hedge. Danish debt is comparatively low and the increase in its budget deficit this year is a temporary jolt resulting from state reimbursements of payments made into the early retirement scheme (Efterlon), which form part of the government’s reforms to the pension system.

ECR contributors nonetheless harbour a variety of economic, political and structural concerns about Denmark, with bank stability causing the most anguish. The country has long been regarded as over-banked, and a series of failures to under-capitalized, mostly small, regional lenders, in addition to fears about the health of the larger financial institutions, have culminated in a 0.5 point drop to Denmark’s bank stability sub-factor in H1 2012.

And the Netherlands, too, is on the decline. Hong Kong, now in 11th position – down one this year – might spring a comeback to displace the Dutch, while Australia is also in hot pursuit, having climbed one place to 12th.

However, an outside bet is Chile, up three places to 16th. Chile’s score of 74.9 is still off the pace, but it scores 8.0 for bank stability and 8.6 for government finances, as well as a range of high and improving political risk sub-factor scores.

Still, a number of other sovereigns stand in the way of Chile’s progress to become the first LatAm top-10 representative, including New Zealand, Austria and the US, in 13th, 14th and 15th places respectively.