Wednesday, September 10, 2008

Changing Risk Profile

In the previous post, we spoke about the risk of sovereign debt. The risk profiles of various countries forecast by the Economist Intelligence Unit (EIU) throws up some interesting results. For countries such as China and India, though fairly high, the risk rating has been consistently decreasing, the reverse is true for the U.S. On most parameters the risk profile for the US has increased. The same holds true for UK as well. Look at the table below -

Country overall currency sovereign debt banking political economic structure
Brazil 40 38 41 41 38 35
China 41 38 31 54 54 35
India 39 37 36 44 39 38
UK 23 25 17 28 7 18
US 24 28 15 30 14 23

While the table above does not show the risk rating over a period of years, EIU data shows that on most accounts, the risk profile of the US has increased in the last decade. For sovereign debt risk, the rating jumped from 3 to 15 in a decade. For China, banking sector and political risk has remained almost constant for a decade.

(For a long-term forecast like this one, EIU develops a framework based on supply side indicators. In such a case output is determined "by availability of labour and capital equipment and the growth in productivity," the EIU states.)

The Wall Street Journal says Asian investors, including the Chinese prevailed upon Treasury officials. http://www.livemint.com/2008/09/10235808/Calls-from-Beijing.html

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