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To varying degrees, Greece, Spain, Ukraine, Austria, Latvia, Mexico are just a handful of the nations viewed at risk of defaulting. Meanwhile, Dubai only just avoided a similar fate thanks to a $10 billion bailout from their oil-rich neighbor Abu Dhabi.
So, who else out there could rattle our constantly more interconnected world? Here's a look at where the trouble spots could be:
Greece: Fitch Ratings last week joined two other ratings agencies in expressing concern about the countrys health. Greece faces the risk of sinking under its debt, Prime Minister George Papandreou said Monday in a speech where he pledged to slash the nations budget deficit by overhauling the nations tax system and cutting government spending.
Ecuador, which defaulted in December 2008 when President Rafael Correa said the nation wouldn't make an interest payment of more than $30 million on a $510 million bond issue, carries a CCC+ rating at S&P. They define the debt issuers in the CCC category as "[c]urrently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments." Translation: Probably in for hard times.
Argentina, Grenada, Lebanon, Pakistan and Boliviaare judged to be a little better off, but they're saddled with still dubious B- ratings. The single-B classification at S&P means these nations are "[m]ore vulnerable to adverse business, financial and economic conditions but currently [have] the capacity to meet financial commitments." Translation: Not good, and needs some things to go right, preferably soon.
Mexico: This week, S&P cut some of its ratings on Americas southern neighbor, but said the outlook is stable. Why the move? Because the agency believes Mexico's attempts to raise money through sources other than oil revenue and to make the economy more efficient "will likely be insufficient to compensate for the weakening of its fiscal profile." Put it on your watch list.
Spain: Before you go thinking that problems can only emerge from closed regimes or places economists have stuck with the "developing" tag, think again. Earlier this month, Spain's outlook was dropped to negative from stable by S&P, owing to fears the nation "will experience a more pronounced and persistent deterioration in its public finances and a more prolonged period of economic weakness versus its peers."
What Is Sovereign Debt?
Now that weve (hopefully) got your attention, here are some definitions for those unfamiliar with the subject:
Sovereign debt refers to the debt of nations. Just as the U.S. issues Treasuries backed by the full faith and credit of the government, other nations sell bonds in order to raise money to pay for programs ranging from armies to public healthcare.
A default refers to a nations inability (or refusal) to repay its debt. Whether a homeowner sends jingle mail (home keys via post) because a lost job makes mortgage payments impossible or because a drop in home values makes paying the mortgage uneconomical, the effect on the bank is the same: they lent money and now theyre not getting it back.
The same goes for investors whove purchased sovereign debts. This is critical because nations debt is often viewed as safer than corporate debt since countries have the ability to raise taxes and increase tariffs in order to raise money to pay their debts.
But safer is not the same as safe and certainly not guaranteed. There are risks in owning nations or sovereign debt, as with any stock. Defaults by Argentina in 2002 and Russia in 1998 are just recent examples in the long history of sovereign debt defaults going back to the Spanish empire in the 1600s.
In a new book This Time Is Different, economic professors Ken Rogoff of Harvard and Carmen Reinhart of Maryland, detail the history of sovereign debt defaults, noting common traits, including:
High Debt-to-GNP Ratio
Since 1970, nearly half of sovereign defaults have occurred in nations debt-to-GNP (gross national product) ratios of 60% or more. This makes sense: As a countrys debts start to approach the size of its total economy (or GNP), it gets harder to make the payments, just like a individual whose debts start to eat up all (or most) of their salary.
Countries like the U.S. and U.K. have triple-A ratings, meaning they are considered the strongest in terms of the ability to repay their debt. (The ratings from top to bottom are based on the alphabet, AAA being the best to CCC meaning the financial world doubts your ability to pay the money back.) However, some experts worry about those pristine ratings being in jeopardy as Anglo-Saxon nations continue to accumulate massive amounts of debt to pay for spending, and to take on the recession.
more at:
is sovereign debt the new subprime: Tech Ticker, Yahoo! Finance
So, who else out there could rattle our constantly more interconnected world? Here's a look at where the trouble spots could be:
Greece: Fitch Ratings last week joined two other ratings agencies in expressing concern about the countrys health. Greece faces the risk of sinking under its debt, Prime Minister George Papandreou said Monday in a speech where he pledged to slash the nations budget deficit by overhauling the nations tax system and cutting government spending.
Ecuador, which defaulted in December 2008 when President Rafael Correa said the nation wouldn't make an interest payment of more than $30 million on a $510 million bond issue, carries a CCC+ rating at S&P. They define the debt issuers in the CCC category as "[c]urrently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments." Translation: Probably in for hard times.
Argentina, Grenada, Lebanon, Pakistan and Boliviaare judged to be a little better off, but they're saddled with still dubious B- ratings. The single-B classification at S&P means these nations are "[m]ore vulnerable to adverse business, financial and economic conditions but currently [have] the capacity to meet financial commitments." Translation: Not good, and needs some things to go right, preferably soon.
Mexico: This week, S&P cut some of its ratings on Americas southern neighbor, but said the outlook is stable. Why the move? Because the agency believes Mexico's attempts to raise money through sources other than oil revenue and to make the economy more efficient "will likely be insufficient to compensate for the weakening of its fiscal profile." Put it on your watch list.
Spain: Before you go thinking that problems can only emerge from closed regimes or places economists have stuck with the "developing" tag, think again. Earlier this month, Spain's outlook was dropped to negative from stable by S&P, owing to fears the nation "will experience a more pronounced and persistent deterioration in its public finances and a more prolonged period of economic weakness versus its peers."
What Is Sovereign Debt?
Now that weve (hopefully) got your attention, here are some definitions for those unfamiliar with the subject:
Sovereign debt refers to the debt of nations. Just as the U.S. issues Treasuries backed by the full faith and credit of the government, other nations sell bonds in order to raise money to pay for programs ranging from armies to public healthcare.
A default refers to a nations inability (or refusal) to repay its debt. Whether a homeowner sends jingle mail (home keys via post) because a lost job makes mortgage payments impossible or because a drop in home values makes paying the mortgage uneconomical, the effect on the bank is the same: they lent money and now theyre not getting it back.
The same goes for investors whove purchased sovereign debts. This is critical because nations debt is often viewed as safer than corporate debt since countries have the ability to raise taxes and increase tariffs in order to raise money to pay their debts.
But safer is not the same as safe and certainly not guaranteed. There are risks in owning nations or sovereign debt, as with any stock. Defaults by Argentina in 2002 and Russia in 1998 are just recent examples in the long history of sovereign debt defaults going back to the Spanish empire in the 1600s.
In a new book This Time Is Different, economic professors Ken Rogoff of Harvard and Carmen Reinhart of Maryland, detail the history of sovereign debt defaults, noting common traits, including:
High Debt-to-GNP Ratio
Since 1970, nearly half of sovereign defaults have occurred in nations debt-to-GNP (gross national product) ratios of 60% or more. This makes sense: As a countrys debts start to approach the size of its total economy (or GNP), it gets harder to make the payments, just like a individual whose debts start to eat up all (or most) of their salary.
Countries like the U.S. and U.K. have triple-A ratings, meaning they are considered the strongest in terms of the ability to repay their debt. (The ratings from top to bottom are based on the alphabet, AAA being the best to CCC meaning the financial world doubts your ability to pay the money back.) However, some experts worry about those pristine ratings being in jeopardy as Anglo-Saxon nations continue to accumulate massive amounts of debt to pay for spending, and to take on the recession.
more at:
is sovereign debt the new subprime: Tech Ticker, Yahoo! Finance
