A salient theme that has emerged from the global financial crisis, and the one that has dominated the headlines ever since Dubai and Greece have stoked fears of a default on their debts, is sovereign risk, writes Nicholas Spiro in his column in the upcoming issue of PropertyEU. Broadly defined as the probability of a government becoming unwilling or unable to meet its loan obligations, sovereign risk has supplanted concerns about banks’ creditworthiness as debt has shifted rapidly from private to public sector balance sheets.
A salient theme that has emerged from the global financial crisis, and the one that has dominated the headlines ever since Dubai and Greece have stoked fears of a default on their debts, is sovereign risk, writes Nicholas Spiro in his column in the upcoming issue of PropertyEU. Broadly defined as the probability of a government becoming unwilling or unable to meet its loan obligations, sovereign risk has supplanted concerns about banks’ creditworthiness as debt has shifted rapidly from private to public sector balance sheets.
For emerging markets with the strongest fundamentals, the effects of financial contagion from the troubles of Dubai and Greece have hitherto been fairly muted. While Central & East European countries seeking to join the euro can hardly take solace from the worst crisis to strike Europe’s single currency, the public finances of, say, the Czech Republic are in considerably better shape than, for example, Spain’s. Since the beginning of this year, Poland, which was the only country in the European Union to avert a recession in 2009, has witnessed a smaller increase in its five-year Credit Default Swap (CDS) spreads than Portugal and Italy.
While many investors and fund managers have traditionally been suspicious of emerging markets, partly because of long-held perceptions that their economies are not run as effectively as those in developed markets, there are signs that 2010 could prove to be a turning point. Having benefited from a decade of prudent macroeconomic management, and untainted by the problems of sub-prime mortgages and toxic assets, many emerging markets entered the financial crisis with relatively low debt burdens and are emerging from it with relatively stronger creditworthiness.
According to a new report by UBS, emerging markets are collectively much better placed than developed economies across a range of indicators, in particular fiscal deficit and public debt-to-GDP ratios. Even among those Central & East European countries, such as Ukraine, the Baltic States and several Balkan countries, whose debt levels are rising rapidly, ‘the situation is cardinally different from that in the developed world’ because of very low current debt burdens relative to many advanced economies.
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