Introducing The Weiss Sovereign Debt Ratings
by Martin D. Weiss, Gavin Magor, and Melissa Gannon | April 28, 2011
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In its April 2011 Fiscal Monitor, the IMF writes:
“Among the advanced economies, the United States, in particular, needs to adopt measures that would allow it to meet its fiscal commitments. Market concerns about sustainability remain subdued in the United States, but a further delay of action could be fiscally costly, with deficit increases exacerbated by rising yields ...
“The additional fiscal stimulus planned for 2011 means that meeting President Obama’s commitment to halve the federal deficit by the end of his first term would require an adjustment of 5 percentage points of GDP over FY2012–13, the largest in at least half a century.”6
Recent Analysis by Leading Private-Sector Research Organizations
Also Supports Weiss Ratings’ Opinion of U.S. Sovereign Debt
Governmental organizations are not in the business of providing specific analysis or sovereign debt ratings. Their mission is limited primarily to a broad description of potential risks and to prescriptions for policymakers. However, well-respected private sector economists have more specifically pinpointed risks that not only cast a shadow of doubt on America’s triple-A rating, but also cite evidence that an honest grade for the U.S. sovereign debt would likely be much lower.
For example, Grant’s Interest Rate Observer lists a series of material weaknesses and risks associated with U.S. government debt.
These risks include the possible loss of the U.S. dollar’s status as a reserve currency; the Federal Reserve’s responses to the 2008-2009 financial crisis, which may expose it to significant credit risk; the U.S. government’s exposure to large contingent liabilities from its intervention during the crisis; large holdings of U.S. government debt by foreign official institutions; and possible reductions in the liquidity of U.S. government securities caused by a decline in the dollar.
They also include improper payments by the federal government, which continue to increase despite the Improper Payments Information Act of 2002; and material weakness from ineffective internal controls over financial reporting, which has resulted in repeated failures by the U.S. government to pass its GAO audits.
The Interest Rate Observer further points out that the U.S. economy is heavily indebted at all levels, despite recent de-leveraging; that U.S. states and municipalities are experiencing severe economic distress, which may require intervention from the federal government; that a rise in interest rates could adversely affect government finances; and that mandatory outlays for retirement insurance and health care are expected to increase substantially in future years.7
Separately, under the direction of former U.S. Comptroller General David Walker, the Stanford Institute for Economic Policy Research (SIEPR) has recently published A Sovereign Fiscal Responsibility Index.8
Using measures that are both quantitative and qualitative, SIEPR gives the United States a low overall ranking of 28 among 34 countries covered; gives Spain, Belgium and Italy higher rankings than that given to the U.S.; and gives only six countries — Hungary, Ireland, Japan, Iceland, Portugal and Greece — a lower ranking than the U.S.’s.
In sum, this research supports the view that the U.S.’s AAA/Aaa rating is an anachronism.
Weiss Ratings Relies Exclusively on
Objective Principles and Procedures
We ensure fairness in our ratings by adhering to the following principles and procedures:
1. No conflicts of interest. Unlike other rating agencies, Weiss Ratings accepts no compensation for ratings, in any form, from institutions it rates. Therefore, it is free to rate sovereign nations objectively — without the concerns other agencies might have regarding the resulting need to downgrade corporations that count on their governments for financing, bailouts or other support.
2. No qualitative factors. Weiss Ratings does not base its sovereign debt ratings on factors that are difficult to evaluate without cultural or political bias. Therefore, the ratings do not consider qualitative factors such as political stability, technological advancement, or communications and transportation infrastructure.
We find that quantifiable financial and economic measures almost invariably reflect qualitative issues. If a country achieves a combination of long-term sustainable growth, fiscal balance and overall stability, it is for a reason. To reward or penalize that country based on Western standards of advancement would risk adding a layer of a cultural and political bias. In this regard, we specifically examined, among others, the World Bank Governance Indicators and Euromoney’s Country Risk ratings, which do include a wide range of qualitative or nonfinancial factors. We determined that, even if we had chosen to include their indexes in our sovereign debt ratings model, they would not have significantly altered the results.9
For these reasons, the Weiss Sovereign Debt Ratings are based exclusively on objective, quantifiable factors that can have a measurable impact on a nation’s financial strength or on the viability of its debt in the global markets.
3. A data-driven, bottom-up analytical approach to ratings. The Weiss ratings process follows four steps:
Step 1. Compilation of a wide variety of data series derived from official sources, including central banks, ministries of finance or equivalent, and the International Monetary Fund.
Step 2. Evaluation of these data series over a five-year period, with progressively greater weight given to more recent years. This approach reduces the effect of market cycles.
Step 3. Grouping of the weighted averages in four separate categories, each producing a proprietary index:
- Debt Index, which measures the country’s overall reliance on deficit financing and debts in proportion to the size of its economy and population.
- Stability Index, which evaluates the country’s strength in terms of its currency, reserves, status as a world reserve currency, access to Special Drawing Rights (SDRs) and long-term default history.
- Macroeconomic Index, reflecting the long-term sustainability of the economy, considering GDP growth, unemployment, inflation and other economic variables.
- Market Acceptance Index, measuring the current and historic capacity of each sovereign government or its agencies to borrow readily in the marketplace.
Step 4. Combination of the four index scores into an overall sovereign debt rating in a structured process that
- does not allow unusual strength or weakness in one particular index to overwhelm or disguise those of other indexes and, at the same time,
- does not allow any sovereign nation to achieve extremely high or low overall grades unless all four indexes are in approximate agreement.
The Weiss Sovereign debt ratings for 47 countries are on page 14, followed by an explanation of each grade level.
Individual or institutional investors seeking further information are invited to visit www.weissratings.com.
Members of the broadcast media should contact Pam Reimer at pam.reimer@wicw.net, while members of the print media should contact Joy Howell at joy@cambridgestrategicpartners.org.
Government entities seeking further clarification of their rating can address their inquiries to sovereign@weissinc.com.
© 2011 Weiss Ratings. All rights reserved.
Weiss Ratings scale: A = excellent, B = good, C = fair, D = weak, E = very weak; plus and minus signs = top and bottom of grade ranges.
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7 “A prospectus for the United States of America.” Grant’s Interest Rate Observer, March 5, 2010, Vol. 28 No. 05.