Nations with strong credit ratings did not experience the sovereign debt crisis that affected countries like Greece, Iceland, and Spain. Many countries with good credit ratings avoided the crisis because, among other reasons, they have large annual GDPs. However, despite healthy GDPs, credit ratings could weaken substantially if the budget deficits and national debt of these countries continue to rise. Today, the total sovereign debt of the 20 highest rated countries is over $15 trillion.
24/7 Wall St. has put together a list of the countries with the safest sovereign debt, based on a report published by Credit Market Analysis, a leading supplier of credit ratings for sovereign debt.
In addition to typical credit ratings, CMA also provided the “Cumulative Probability of Default” (CPD) for these countries. Some of these nations, as would be expected, have a very high probability of defaulting on their debt. According to the report, Greece and Venezuela each have at least a 50% chance of being unable to cover their sovereign debt in the next five years. As a result of the Greek credit crisis, these countries and others, including Spain and Portugal, have received a great deal of attention in the press.
Despite the attention paid to countries with high credit risk, it is the countries with low probabilities of default – less than a ten percent chance of defaulting in the next five years – that deserve greater attention. These economies are still recovering from one of the worst global economic crises in history. Like the U.S., many of these governments adopted aggressive policies to limit damage done to their economies. Many of these governments were willing to borrow heavily to fund expensive stimulus packages and industry bailouts. Their high sovereign credit ratings allowed them to do it with almost no limit to the amount they could borrow.
While the nations on this list spent trillions of dollars with borrowed money, nearly every economy on this list experienced at least a half-year of GDP contraction, contributing to a massive assumption of debt. As a result, many nations on the list have debts which represent more than 25% of their GDP. And some have debt of over half of their GDP, including the U.S. (52%), Germany (72%), and France (77%).
Thus, high-rated countries were able to assume massive debt to prop up their own economies, while less stable countries in the euro zone and elsewhere faltered. Accordingly, global markets were able to right themselves despite the collapse of smaller countries.
There is a risk, however, that capital markets will not always be able to meet the credit demands of the world’s largest and “safest” countries. As each nation’s debt grows, it is possible that even stable nations will have to compete for funding by increasing interest rates to the brink of sustainability- something the U.S. and the rest of the G8 have never had to do. All of this will only place additional strain on the capital markets, which could become quickly exhausted. That, in turn, could trigger a funding crisis for the treasuries of some of the world’s largest economies.
Countries on 24/7 Wall St.’s list are those with “the safest sovereign debt” in the world, according to the CMA and the major recognized ratings organizations. These are the nations that comprise the vast majority of global GDP and that lending organizations consider to be the most economically stable nations in the world. They also maintain among the highest levels of debt. Here’s why these countries have been safe, and why some of them might not be in the near future.
CPD% (Cumulative Probability of Default): 2.3%
GDP (Nominal): $369 billion
Total Sovereign Debt: $223 billion
Sovereign Debt As % Of GDP: 60.6%
Norway has profited heavily since its oil industry accelerated in the 1970’s and the country began receiving massive sums from petroleum exports. This influx of oil revenues has led the Scandinavian nation to the height of global prosperity. It has one of the lowest unemployment rates in the world and as one of the wealthiest populations in terms of GDP per capita. While the nation actually has an underdeveloped industrial sector, relying primarily on petroleum exports as well as shipping, the Norwegian government has set up a $457 billion fund to deal with the inevitable transition to a post-oil-based economy once reserves begin to diminish. Even this sum may not be enough to cushion a smooth transition from oil production.
GDP (Nominal): $242 billion
Total Sovereign Debt: $106 billion
Sovereign Debt As % Of GDP: 44%
Finland experienced a serious recession in the early 1990’s. Since then, the Scandinavian nation recovered in a remarkable way, experiencing nearly two decades of uninterrupted growth. This period of prosperity has begun to wane, primarily due to the global economic crisis. Finland currently has a GDP growth rate of -7.8%, down from +1% the previous year. If this trend continues, don’t expect the CPD to remain this low for long. The nation nevertheless remains a European powerhouse. It trades heavily with the United States, primarily exporting machine parts and metals.
GDP (Nominal): $14.43 trillion
Total Sovereign Debt: $7.6 trillion
Sovereign Debt As % Of GDP: 52.9%
The United States Treasury bond has been the gold standard for safe investment since the 1950’s. The global economic recession hit the United States hard, and GDP contracted for the majority of 2009. In order to relieve pressure on American businesses, the U.S. government underwent a series of expensive bailouts in the auto industry and financial sector, paying out hundreds of billions of dollars. The United States economy has begun to recover, but growth has been slow. Citing a more-sluggish-than-expected recovery, the Fed has just decided to buy more debt.
GDP (Nominal): $308 billion
Total Sovereign Debt: $128 billion
Sovereign Debt as % Of GDP: 41.6%
The small Scandinavian nation benefits from having a heavily positive balance of trade. It has one of the largest shipping industries in the world and exports machine parts and meat products. Despite a 5% drop in GDP as a result of the global financial crisis, Denmark has a small population and a high gross domestic product, and so the country maintains a good standard of living and level of economic stability.