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The 10 riskiest and least risky nations to invest in

Last updated on: January 13, 2011 14:05 IST

The 10 riskiest and least risky nations to invest in

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India ranks as the 22nd riskiest sovereign country, seen as most likely to default on debt and unable to honour its debt obligations.

A report, 'Sovereign Risk Report for Q4 2010', released by world's leading credit default swap pricing service, CMA of London, ranks the world's nations as the top ten most and least risky nations when it comes to sovereign debt.

Sovereign risk is defined as the risk that a country or agency -- backed by that the credit of the government of that nation -- will default on its loan or fail to honour other business commitments due to a change in national policy.

According to the fourth quarter sovereign debt credit risk data by CMA, India has a 13.5 per cent chance of defaulting over the next five years. (Note: State Bank of India is used as proxy for India).

India tightened 13 per cent in Q4. However, year-on-year, the cost of protection widened to 160 bps (basis points) from 118 bps.

The country's CMA Implied Rating is CMA_bbb+. CMA Implied Ratings are calculated using a proprietary model developed by CMA and input with CDS pricing data from CMA Datavision. The Credit Default Swap values used are calculated by CMA Datavision, an independent credit default swap pricing service based on data collected from CMA's consortium of over 35 CDS buy-side firms.

Unless otherwise stated, all CDS values are the midpoint on the five year tenor and are based on London closing values from December 31, 2010.

This information is especially useful for institutions or individuals with deep pockets looking to invest in markets globally.

So which are the world's 10 most risky and 10 least risky sovereigns? And where does China stand?

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Image: India.
Photographs: Reuters
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The top 10 most risky sovereigns

1. Greece

Greece is the riskiest sovereign currently. It has a 58.8 per cent chance of defaulting. Its CMA implied rating is CMA_ccc-.

Greece, widening 32 per cent in Q4, tips Venezuela off the top spot as the world's most risky sovereign.

Greece's downfall had been scripted deftly by its governments. From one of the fastest growing economies in the Eurozone during the 2000s, Greece has now become the main culprit for this financial crisis.

From 2000 to 2007, it grew at an annual rate of 4.2 per cent as with the inflow of foreign capital into the country.

However, the global financial crisis in 2008 had hit Greece severely. Two of its major revenue streams, tourism and shipping were badly hit. The government of Greece misreported economic statistics in a bid to keep up with the monetary union guidelines.

Corruption and cover-ups added to its mounting debt. Greece had paid Goldman Sachs and other banks hundreds of millions of dollars as fees for arranging transactions that hid the actual level of borrowing since 2001.

In May 2010, the Greek government deficit was estimated to be 13.6 per cent of its GDP, one of the highest in the world. Greek government debt was estimated at  Euro 216 billion in January 2010. Several people led protests against tax hikes and spending cuts announced by the government. To many, credit ratings do not matter much, but they certainly do to long-term serious investors, and risky sovereigns find it difficult to attract big-ticket investments to boost growth and generate employment.

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Image: Greece.
Photographs: Reuters
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2. Venezuela

Venezuela is the second riskiest sovereign, with a 51.4 per cent chance of default. Its CMA Implied Rating is CMA_ccc+.

Note: CPD is a function of the markets' recovery level, which varies according to several factors and distance to default. Venezuela is assumed at 25% and Greece at 40%.

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Image: Venezuela.
Photographs: Reuters
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3. Ireland

With a 41.2 per cent chance of defaulting on its debts, Ireland has a CMA Implied Rating of  CMA_b. It is the 3rd riskiest nation to invest in.

Ireland enters the top five following the bailout of its banking system and a subsequent widening of 35 per cent.

Actually, Ireland's troubles are not really very recent. The country is in deep economic trouble with a government deficit of 14.3 per cent of GDP. The recession-hit economy plunged further with the collapse of the construction industry. The cumulative fall in GDP over three years has been 12 per cent in real terms.

Ireland, once called the Celtic Tiger, was for long a bubble waiting to burst. The amalgam of ample credit at pathetically low interest rates, cheap real estate, and recklessness of the common Irishman made for an ideal sub-price crisis that has now pushed the country to the brink of bankruptcy.

Add to it the nexus between politicians, builders and bankers, who are now being held responsible for turning the Celtic Tiger into a mouse.

With the recession setting in and people losing their jobs, most big borrowers were unable to service their loans. Homes of people who could not repay their loans were repossessed, but by that time the cat was out of the bag and real estate prices plummetted.

This resulted in banks being unable to recover their money by selling the repossessed homes as property values crashed.

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Image: Ireland.
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4. Portugal

Portugal has a 35.9 per cent chance of defaulting. Its CMA Implied Rating is the same as Ireland at CMA_b.

Portugal also widened -- by a more modest 22% in Q4 -- but the cost of protection in Portuguese banks remains high.

Portugal is another country in the  Eurozone facing a severe crisis. According to bond markets, Portugal is the riskiest country in the Eurozone.

The country's public debt was at 77 per cent of its GDP last year and the budget deficit at a shocking 11.4 per cent of GDP.

The EU's debt crisis could spill over into banks in Portugal, Spain, Italy, Ireland and the UK, according to Moody's.

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5. Argentina

Argentina has a 35.4 per cent chance of default, making it the 5th riskiest soverign. Its CMA Implied Rating is CMA_b.

Argentina tightened nearly 20% this quarter as it pledges to repay the Paris Club of investors.

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6. Ukraine

Ukraine has a 30.6 per cent chance of default.

Its CMA Implied Rating is CMA_b.

However, among the economies that are floundering, Ukraine has been the best yearly performer, tightening 59% on the year.

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7. Spain

Spain, with a CMA Implied Rating of CMA_bb- is the world's seventh riskiest sovereign. It has a 26.7 per cent chance of default.

Spain with 11.2 per cent of the GDP. The interest on two year sovereign bonds has zoomed to 20 per cent, signalling the huge defaults.

Rating agencies have downgraded the debts of Spain and Portugal in addition to that of Greece. Spain's 20 per cent jobless rate is the highest in the developed world.

Standard & Poor's lowered Spain's long-term sovereign credit rating to 'AA' from 'AA+'. There could be a further downgrade.

Concerns that Spain has some similarities to Ireland -- a debt-driven property boom bust -- helped drive the cost of protection wider by 50% and into the top 10 most risky.

China's support for Spain both in terms of long-term debt holding and imports will help support one of the most important economies in the region.

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8. Dubai

Dubai is the eighth riskiest sovereign to invest in. With a CMA Implied Rating of CMA_bb-, it has a 25.5 per cent chance of default.

The Dubai bust story proves that all that glitters is not gold. One of the richest cities in the world, Dubai sent shockwaves across the world when it asked creditors to freeze repayment of debt worth billions of dollars of two of its flagship firms - Dubai World and real estate developer Nakheel.

The emirate is immersed in a debt of $80 billion by expanding in banking, real estate and transportation. In November 2009, Dubai World with $60 billion liabilities sought a six-month standstill on its debt repayment to all its lenders.

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9. Hungary

Hungary, with a CMA Implied Rating of CMA_bb- is the world's ninth riskiest sovereign. It has a 23.6 per cent chance of default.

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10. Iraq

Iraq, with a CMA Implied Rating of CMA_bb- is the world's seventh riskiest sovereign. It has a 23.1 per cent chance of default.

Caught between painful reconstruction of its society and its infrastructure, Iraq remains very illiquid. The continuous war-like clouds hovering over the nation makes it very risky for investors.

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The top 10 least risky sovereigns

1. Norway

Norway has just a 2.1 per cent chance of defaulting on its debt. Its CMA Implied Rating is CMA_aaa. It is the least risky sovereign.

There has been no change in the top three least risky sovereigns.

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2. Finland

Finland has a 3.0 per cent chance of defaulting on its debt. Its CMA Implied Rating is CMA_aaa. It is the second least risky sovereign.

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3. Sweden

The chances that Sweden will default on its debt are as low as 3.0 per cent. Its CMA Implied Rating is CMA_aaa. It is the third least risky sovereign.

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4. Switzerland

There is only a 3.6 per cent chance that Switzerland would default on its debt. Its CMA Implied Rating is CMA_aaa. It is the fourth least risky sovereign.

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5. The United States of America

The US has a 3.6 per cent chance of defaulting on its debt. Its CMA Implied Rating is CMA_aaa. It is the fifth least risky sovereign.

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6. Hong Kong

Hong Kong has just a 3.9 per cent chance of defaulting on its debt. Its CMA Implied Rating is CMA_aaa. It is the least sixth risky sovereign.

The Hong Kong economy expanded 6.50 per cent over the last year. Hong Kong's gross domestic product is worth $215 billion, 0.35 per cent of the world economy, according to the World Bank.

Among other regional countries, Lebanon has 19.2 per cent chance of default, Egypt 15.7 per cent and Bahrain 12.3 per cent.

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7. Denmark

Denmark, with a CMA Implied Rating of CMA_aa+, is the seventh least risky sovereign. The chances that it will default on its debt are a mere 4 per cent.

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8. Australia

Australia has just a 4.4 per cent chance of defaulting on its debt. Its CMA Implied Rating is CMA_aaa. It is the eighth least risky sovereign.

Australia's economy grew at the fastest pace in three years in the second quarter as demand for iron ore and other commodities saw an upswing.

The economy grew by 1.2 per cent in the April-June quarter from the previous quarter, accelerating from revised growth of 0.7 per cent in the first quarter.

With a $38 billion bailout package, Australia tided over the global recession better than most developed countries. Competitiveness, fiscal prudence, and natural resources ensured a strong growth momentum.

The Australian market has averaged 6.8 per cent returns over the last two years, and is up 11 per cent during last one year.

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9. Germany

Germany has a CMA Implied Rating is CMA_aa+. It is the ninth least risky sovereign. The chances that it might default on its debt are 5.2 per cent.

Germany's cost of protection did not escape the general malaise in Europe, widening 52% to 59 bps.

Meanwhile the Netherlands moves out of the top ten least risky following a widening to 62 bps this quarter.

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10. Saudi Arabia

Saudi Arabia has just a 5.2 per cent of defaulting on its debt. Its CMA Implied Rating is CMA_aa+, the same as Germany and Denmark. It is the 10th least risky sovereign.

Saudi Arabia has been ranked among the world's top 10 countries in terms of least risky debt sovereign.

Abu Dhabi has been ranked as the third-best performer as its credit default swaps tightened to just under 18 per cent. Overall, the emirate ranks 20th in the world, with its chance of default rated at 6.5 per cent. Qatar has a 6.1 per cent chance of default, and was ranked fifteenth in the world.

Dubai improved one place since the third quarter but still has a 25.5 per cent chance of not meeting its debt obligations.

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China

China has a 6 per cent chance of defaulting over the next five years, says the CMA report.

This makes it the 52nd riskiest sovereign. Its CMA Implied Rating is CMA_aa+.

The Chinese economy grew by an impressive 10.30 per cent over the last year, as measured by the year-over-year change in gross domestic product.

From 1989 to 2010, China's average annual GDP growth was 9.30 per cent, hitting a high of high of 14.20 per cent in December 1992. In 2009, China was able to maintain a stable growth of 8.7 per cent.

China's fast-paced economy is likely to surpass Japan by 2020 and topple the US economy to become the world's largest by 2050.


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