Tuesday, March 13, 2012

The Sovereign Debt Tier List

Everyone loves rankings. Ordinal position, for some unknown; doubtlessly biological, demands a visceral response from people. They can be found everywhere, from positions of strength in sporting events to relative skill amongst interior decorating firms.

Therefore, The Recapitulator will humbly present his "Tier List" of rankings for sovereign debt, worldwide. The rankings will be organized into 4 tiers that represent relatively homogeneous groups. The bonds most likely to generate full face value (in nominal dollars, anyways) will be listed first in their respective tier.

Tier 1 These countries represent the pinnacle of the global financial system. They enjoy vast circulation, and are typically backed by fungible tax dollar guarantees from their respective governments. In addition, they offer prestige and security, and promise the holder a better alternative than any other liquid asset. These countries typically run Current Account deficits given their wealthy position in the world and the desire of the rest of the world to net save financial assets from these countries results in Capital Account surpluses. Furthermore they tend to have historcially stable governments, top level legal systems (emphasizing the rule of law, checks and balances, reliable term limits, and deference to Anglo-Saxon common law as its formative firmament), the ability to project power (both "soft" and "hard"), and a population that exhibits relative peace and normality. In short, the perfect jurisdiction to park assets anytime, but especially so in volatile periods.

Tier 2 These countries enjoy very low default probabilities, typically have floating currencies with stable populaces and very good legal systems based on anglo-saxon or Roman law derivatives. They have capable but small militarys that focus on national defense. These countries typically run Current Account surpluses given the medium-high and rising living standards, and also conversely run Capital Account deficits as the rest of the world finds other jurisdictions more attractive.

Tier 3 These countries enjoy low default probabilities, are typically mercantilistic in nature as they require foreign capital in order to invest in energy, weaponry, and foodstocks. Their legal and property rights systems are stable, but in application exhibit an arbitrariness not seen amongst higher tiers.

Tier 4 These countries have significant default probabilities. This could be for a number of reasons, but typically a lack of rule of law coupled with an unstable history with multiple government structures in a relatively short period of time. Lack of continuity and cultural links also contribute to the problems these countries face.

Hard to place in a portfolio (HTIAP): These countries are simply too unstable to place into any tier list of acceptable risks. They suffer from tyrranical government, sanctions from one or more "global authorities", and lack of connectivity to the global economy. Furthermore, they have little or no natural resources, difficult geography, and poor leadership.

So, without further delay, the list:

Tier 1: U.S.A., U.K, Canada, Japan, Switzerland, Netherlands

Tier 2: Norway, Germany, France, Brazil, India, Sweden, South Africa, Russia, Australia, New Zealand, South Korea, Belgium, Poland, Czech Republic, Finland, Denmark

Tier 3: China, Pakistan, Kenya, Uruguay, Italy, Mexico, Chile, Turkey, Argentina, Indonesia

Tier 4: Saudi Arabia, Venezuela, Singapore, Spain, Portugal, Ireland, Iceland, Columbia, Vietnam, Sub Saharan Africa***, Saudi Arabia, Qatar, UAE. Namibia, Columbia, Bolivia

HTIAP: Hungary, Albania, Romania, Nicaragua, Thailand, Sri Lanka

***Subject to change quickly given U.S. involvement

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