Norway is the least-risky nation on the planet, Greece is the riskiest country, and the debt of the United Kingdom is surprisingly suspect relative to other developed nations, according to a new index of sovereign risk just released by BlackRock , the largest publicly traded asset manager.
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Private Equity Risk
ordic country “benefits from extremely low absolute levels of debt, a strong institutional context and very limited risks from external and internal financial shocks,” said Benjamin Brodsky, head of fixed income asset allocation at the firm, which has $3.65 trillion under management.
BlackRock created the investing tool to capitalize on macro themes that have dominated headlines as Europe’s woes and the U.S. debt ceiling become the biggest issues of 2011. Macro investing has also seen more inflows than any other hedge-fund category this year, according to a number of surveys.
The asset manager attempts to go a step further than just the usual debt-to-gross-domestic-product ratio analysis. It also factors in an exhaustive list of metrics that fall under four broad categories: proximity to distress, external finance position, banking sector health and willingness to pay.
“The high correlation between the BlackRock Sovereign Risk Index and CDS spreads suggests that we have identified significant drivers of sovereign risk, even while avoiding direct inclusion of market-based measures in the index,” states the report.
Other notable surprises in the 44-country index, which assigns a single score to each nation, are Canada at No. 6, the U.S. at 15th just behind China and the U.K. at 22, with a negative “risk index score.”
The U.K., a prime example of the broad factors the index takes into account, is behind countries including Russia and Peru because of its weak banking sector.
“While the country’s institutional strength and integrity is notable, and it is insulated from external financial shocks, its weakness is attributable to a weak fiscal space profile, while contingent liabilities to the financial sector drag,” states the report. “In addition, the U.K.’s growth of credit has outpaced GDP in recent years, a hallmark of a bubble.”
Rounding out the bottom five of the index, following Greece, are Portugal, Venezuela, Egypt and Italy. Sweden, Switzerland, Finland, and Australia are among the top five for your money. But the highest score, by far, is the debt of Norway.
“They’re oil rich and fiscally conservative,” said Larry McDonald, author of "A Colossal Failure of Common Sense, the Lehman Brothers Inside Story." The country has about $300,000 per person in oil reserves, according to McDonald, who gave a speech at a bank in the country last year.
Norway’s GDP per capita is the seventh-highest in the world, and it is the ninth-biggest oil exporter in the world, according to the CIA World Factbook. Besides petroleum products, the country’s biggest exports are machinery, metals, chemicals, ships and fish, according to the CIA.
There is a catch however. Because Norway’s debt load is so relatively small, there are fewer bonds available for investment. There is an equity ETF (the Global X FTSE Norway 30 ETF ), but just because a country has the finest credit in the land, doesn’t mean its equity market has the greatest potential return. In fact, often the opposite is often true.
What’s more, Norway’s dependence on oil could cause the country’s creditworthiness to fall from the top position, according to some traders. Brent crude oil is off 27 percent from its high this year.
“This love affair with Norway, Australia , South Africa , and Russia will end very badly,” said Steve Cortes, head of Veracruz LLC and a ‘Fast Money’ trader. “These are one-trick-pony bets on commodities, which have been just trounced since May 1.”
Another catch—so to speak—is that spot salmon prices have dropped big time in the last two weeks, points out Brian Kelly of Brian Kelly Capital.
While these may all be valid factors in evaluating a Norway investment prospects, BlackRock believes that the country’s credit still has the least likelihood of “default, devaluation or above-trend inflation.”
This is something that certainly can’t be said of many countries on this indebted globe these days.
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