The conflict over Catalonia’s independence from Spain heated up this week. The Spanish government took steps to remove the Catalan government and organize regional elections within six months, while separatist leaders in Catalonia called for peaceful protests against Madrid’s implementation of direct rule.
The outcome is still up in the air and tensions are likely to linger for months, but Spanish markets have been relatively steady in recent weeks. Stocks are only modestly lower and bond yields are weaker. However, the conflict is having an effect on some measures of the creditworthiness of Spanish sovereign debt. Spain fell three notches to the 40th spot in the latest quarterly update of our BlackRock Sovereign Risk Index (BSRI) rankings of government debt in 60 countries.
Each country’s final BSRI score and ranking is based on four categories. Fiscal Space (40%) assesses whether a country is on a fiscally sustainable path, while External Finance Position (20%) examines how leveraged a country might be to trade and policy shocks outside of its control. Willingness to Pay (30%) gauges if a country displays qualitative cultural and institutional traits that suggest both ability and willingness to pay off real debts, while Financial Sector Health (10%) seeks to account for the likelihood of a country’s financial sector needing a state bailout down the road.
Spain fell in our rankings as instability in Catalonia hurt its Willingness to Pay metric, though Spain does score relatively highly on this component. Its weakest score comes in Fiscal Space.
Spain was just one of the big movers this quarter. The third quarter saw a big shake-up in BSRI rankings after many countries upgraded their reporting of net debt levels to the International Monetary Fund (IMF), our key data source for this indicator. The changes make the data more comparable across countries and essentially mean that certain financial assets that were previously excluded from net debt calculations are now included, while equity assets are now excluded. This methodology change resulted in large one-off swings in certain countries’ rankings.
Lithuania and Slovenia jumped 11 and nine notches, respectively, with the former breaking into the BSRI’s top 20 at number 19 and the latter ranked 38th. Scores for both countries saw large improvements in Fiscal Space, mainly driven by a decrease in net debt over gross domestic product (GDP). For Lithuania, a relatively new entrant to the BSRI, improving budget deficits, a less front-loaded debt term structure and a brighter economic growth outlook spurred the jump in rank.
Ireland, South Korea and France saw relatively significant improvements in ranking compared with the June quarter. Ireland, ranked 15th, and South Korea, ranked 11th, were bolstered primarily by downward revisions to their net debt-to-GDP ratios that led to hefty improvements in Fiscal Space. France’s score was little changed, but its ranking was nudged higher to number 27 by a reshuffling of its neighbors in the index. France’s Willingness to Pay metrics also rose in the wake of optimism over reformist Emmanuel Macron’s presidential election victory.
Belgium and Poland saw the sharpest deterioration in the BSRI, the former now at number 34 and the latter at 31. Both were hurt by a large slump in Fiscal Space metrics driven by the IMF debt-level revaluations. Finally, the U.S. slipped three notches to 16th, with weaker long-term growth expectations weighing on its Fiscal Space metrics and downgrades to its perceived government effectiveness reflected in a weaker Willingness to Pay score. Read more about our rankings in the full BSRI update.