Country Risk: Measurement Approaches and ECAIs Rating

The financial crisis and global economic downturn have caused a sharp deterioration in public finance across advanced economies. Between the end of 2009 and the beginning of 2011, the large fiscal deficits gave rise to the perspective of a rapid increase in the debt-to-GDP ratio in several euro area countries; the deficit increased from 1 percent to 8 percent, while the Gross Government Debt rose from 73 percent to 97 percent of the GDP. In emerging economies, government debt levels trended lower. The concerns with regard to the difficult budgetary position of Greece, shortly followed by similar worries about Portugal and Spain, resulted in a much more significant broadening of credit spreads in sovereign bonds and related CDSs. In early 2010, the credit differentials referring to other sovereign issuers in the euro area also increased, and a more marked increase in spreads with reference to the Greek debt was recorded due to investors fearing Greece’s default. On the other hand, the differentials concerning the bonds issued by Ireland, Great Britain and the United States were almost unaltered in the course of the same year (BIS, March 2011). In this context, the CDS market on government bonds from developed countries — nearly nonexistent a few years ago, when sovereign CDSs were chiefly referred to emerging debt — noticeably intensified when investors adapted their exposition to sovereign risk.