It was a bad year for sovereign bonds, with the cost of borrowing from the financial markets rising almost across the globe amid volatile markets
Even the United States suffered a downgrade although it still ranks second on the least-risky list. The troubles of the eurozone pushed European nations such as Italy and Hungary into the high-risk zone for the first time, which means that EU nations now make up exactly half of the top ten riskiest sovereign borrowers. Latin America accounts for two places with Asia, Eastern Europe and the Middle East occupying the other spots.
The price countries pay to borrow money basically comes down to debt-worthiness. Some countries have low debt because they have difficulty in borrowing while others have high debt because they are good repayers, like the UK. Generally, the financial markets look closely at the ratio of total public debt to gross domestic product. But one main reason for the rising cost of sovereign debt is that nations’ debt levels have been on the rise for 60 years or more.
There are other factors in the cost of debt such as a country’s history of meeting its obligations. Spain cancelled its debt no less than six times in the 16th and 17th centuries. Argentina was either in default or nearly so for a quarter of the years between 1899 and 2001, the year of its last default. In 1917 Russia’s new revolutionaries repudiated all debt incurred under the czars.
No surprise, at year’s end the dubious honour of heading the league table of highest-risk sovereigns belonged to Greece. Rated by the five-year benchmark of cumulative probability of default among other factors, the latest CMA global sovereign debt credit risk report listed the ten riskiest sovereign bonds in the following order: Greece, Portugal, Venezuela, Argentina, Pakistan, Ukraine, Ireland, Italy, Hungary and Dubai.
At year’s end the most indebted countries relative to their GDP included:
1. Zimbabwe – 234.1% of GDP, pariah of debt markets
2. Japan – 197.5%, hard-hit by the tsunami
3. Greece – 142.8%, possibly heading for default
4. Lebanon – 133.8%, deceptively, has a strong banking sector
5. Iceland – 126%, hopelessly indebted banks
6. Italy – 119% of GDP, economy in need of reform, now paying over 7% for its debt
7. Singapore – 106%, a great borrower and repayer
8. Belgium – 101%, no government for most of 2011 didn’t help
9. Egypt – 90%, high but it’s recovering from a revolution
10. European Union – 82%, stronger countries like Germany are contaminated by the weakest