Moody’s, the international ratings agency has ranked Spain as top of its Misery Index – – a metric which adds a country’s fiscal deficit and the unemployment rate – – and Ireland gets a fourth ranking.
Spain, is followed by Latvia, Lithuania, Ireland, Greece and the UK. The US is eighth – – just after Iceland.
The original “misery index” – – an addition of inflation and the unemployment rate — was invented by economist Arthur Okun in the 1970’s while he was a scholar at the Brookings Institution in Washington DC. Previously he had served as a member of President Lyndon Johnson’s Council of Economic Advisers and a professor at Yale.
The timing of the invention of the term “misery index” coincided with what was called “stagflation” – – a time of no growth but with both high inflation and high unemployment.
The ratings agency said on Tuesday that buyers of gilts were not likely to continue supporting countries unless credible plans to restore public finances to health, were unveiled.
“For most of 2009, the assumption was that governments could decide on the timing: first react to the crisis, then announce future plans, and finally implement,”Moody’s said.”Such an assumption may be proven wrong… Aaa countries will probably not have the luxury of waiting for the recovery to be secured before announcing credible fiscal consolidation plans.”
2010 may prove to be a tumultuous year for sovereign debt issuers, says Moody’s Investors Service in its first annual “Sovereign Risk: Review 2009 & Outlook 2010” report titled “Fasten Your Seat Belts: Tumultuous Times Ahead” (available publicly to subscribers). The rating agency’s view is based on the uncertainties surrounding the likely pace and intensity of fiscal and monetary exit strategies as governments start to unwind quantitative easing programs.
Indeed, according to Moody’s, the only certainty is that the exit strategies will be fraught with a good deal of execution risk. “The key policy challenge facing advanced economies is to time the exit perfectly: not too quickly or too soon so as to prevent choking off growth; and not too slowly or late so as not to unsettle financial markets,” says Pierre Cailleteau, Managing Director of Moody’s Global Sovereign Risk Group.
Moody’s new report says that the context for sovereign risk assessment has changed dramatically since the beginning of the crisis in mid-2007. “This is mainly because of the crisis of public finances that has beset many rich countries in what Moody’s believes will be the final — and disturbingly long-lasting — stage of the crisis,” says Cailleteau.
Moody’s report provides a brief review of 2009, focusing on the rating agency’s interpretation of the challenging events that were triggered by the bankruptcy of Lehman Brothers in late 2008. The report then provides an outlook for 2010 and identifies the key themes which Moody’s believes will shape the state of sovereign risk in 2010.
“The overriding theme is that 2010 will at best see a ‘normalization’ and at worst a severe tightening in government financing conditions,” says Cailleteau. Long-term interest rates may increase more rapidly than expected, driven by the slow unwinding of quantitative easing. The end to exceptionally low financing conditions will expose the true cost of the crisis on government debt affordability across the world.
A further key theme is that Aaa governments will probably not have the luxury of waiting for the recovery to be secured before announcing and perhaps also implementing credible fiscal consolidation programs.
Moreover, as most governments simply cannot afford another financial crisis, they will attempt to ring-fence their balance sheets from selected contingent liabilities. “This could in some cases create disorderly market conditions,” cautions Cailleteau.
Moody’s also notes that euro membership will protect some countries against liquidity risk but not against long-term insolvency risk.
“Despite a slow process of global sovereign risk convergence — i.e. a narrowing of the ratings gap between rich and poorer G20 countries — BRIC countries are unlikely to replace the large Aaas’ role as anchors to the system any time soon,” says Cailleteau.
A further theme identified by Moody’s report is that the crisis has once again revealed the dangers of financial globalisation for emerging markets — namely, the upside of the recurrence of asset price inflation after the downside of precipitous outflows of capital. However, the arsenal of policy levers has not expanded.
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