19 Countries in Fiscal Trouble; 10 in Good Shape

Martin D. Weiss, Ph.D.

We have reached a momentous pivot point in the history of nations, with far-reaching impacts on your investments, your home, your job and your entire financial future.

But I have some critical new research this morning that could make the difference between your success or failure.

Over the years, I’ve visited every continent except Antarctica and studied every major language except Arabic and Hindi.

I’ve seen eight recessions and two depressions in multiple countries.

I’ve personally witnessed extreme deflation and hyperinflation.

But in all the time since I founded my research company four decades ago, I’ve never seen anything quite like the whirlwinds and dark clouds now encircling the so-called advanced economies of the world.

Even before the next recession, one-quarter of their people are already jobless.

Even before the next big storm, they’re already drowning in debt they could never possibly repay.

And even after countless global summits, their only “solution” is to pile on still more debt — much as euro-zone leaders just proposed last week in Brussels.

Does This Debt Crisis Doom the Entire World to an
Endless Cycle of Depression and Financial Turmoil?
 
Or Is There a Light at the End of the Tunnel?

Depending on the answer, you might decide to hide in a corner … or come out slugging.

You might withdraw from the world of investing altogether … or seek to profit handsomely from the fallout.

Get it right and you stand to save — or make — a fortune.

Get it wrong, and nearly everything you’ve worked for in the past — or planned for the future — could be swept away.

This decision is probably the most important decision of your life — far too critical for your future to answer with a mixed bag of official promises, conjecture, fear or hope.

Instead, what you should always seek out — and what I am giving you in this report today — is something that, unfortunately, has become progressively scarcer in this political season:

Unbiased, accurate, meaningful DATA.

Based on this, I’m going to give you our latest Weiss Ratings for the weakest and strongest countries in the world.

I’m going to demonstrate that …

•   The PIIGS countries — Portugal, Ireland, Italy, Greece and Spain — are definitely NOT the only ones in Europe vulnerable to this massive debt crisis.

•   Also vulnerable are the United States, the United Kingdom, Canada, Japan and others!

•   But there are lights at the end of the tunnel, quite a few in fact: The finances of many East Asian and emerging market countries are actually in far BETTER shape than those of most “advanced” countries.

How Do We Know?

Weiss Ratings website
Weiss Ratings website

To arrive at this conclusion, our Weiss Ratings division compiles multiple years of data on 50 sovereign nations from central banks, ministries of finance and international organizations.

We measure each country’s overall reliance on deficit financing and debts in proportion to the size of its economy.

We scrutinize the capacity of each sovereign government to borrow readily in the marketplace — in order to roll over its maturing debts.

We look at each country’s strength in terms of the stability of its currency, the size of its reserves, its status as a world reserve currency, its access to Special Drawing Rights and its long-term history of defaults.

We examine the sustainability of its economy — present, past and future.

And then we give it a rating — with no conflicts of interest!

Unlike the Big Three rating agencies (S&P, Moody’s and Fitch), we accept no compensation for ratings — in any form — from the institutions we rate.

Unlike other ratings agencies, we never base our ratings on factors that could be influenced by political or cultural bias. We owe no allegiance to any financial institution, industry association, political party or faction.

Our sole loyalty is to the individual consumers, savers and investors who use our ratings to protect themselves from the risks that companies and countries are taking with their hard-earned money and tax dollars.

Indeed, it’s largely because of this objectivity that …

Weiss Ratings Track Record
Weiss Ratings Track Record.

•   We have warned, usually by one year in advance or more, of nearly every bank that has EVER failed since we began rating banks decades ago. (SeeWeiss Ratings’ current track record.)

GAO praises Weiss
GAO praises Weiss

•   The U.S. Government Accountability Office (GAO) found that our insurance company ratings beat the Big Three rating agencies hands down and outperformed our #1 competitor’s by a factor of three to one. (See U.S. Government Accountability Office (GAO) — Insurance Ratings: Comparison of Private Agency Ratings for Life/Health Insurers.)

•   We were able to NAME — well ahead of time — nearly all major companies that failed or needed a bailout in the debt crisis of 2008-2009, including Bear Stearns, Lehman Brothers, Fannie Mae, Washington Mutual, Citibank, Bank of America, plus many more. (For all the evidence, see The Only Ones Who Warned Ahead of Time.)

•   And we were the first rating agency in the world to recognize the weaknesses of U.S. government debt and downgrade it accordingly. (See The Weiss Ratings ChallengeUnited States Receives Sovereign Debt Rating of C and Weiss Ratings Downgrades United States Debt to C-Minus.)

Why We Rate the U.S. Government C-

Here’s what we wrote on April 28, 2011, updated to reflect a more recent downgrade (from C to C-) …

On the high end of the Weiss ratings scale, only sovereign countries with stellar scores in four major areas — debt burdens, international stability, economic health and market acceptance — merit a grade of A- or better.

Meanwhile, on the low end of the scale, only countries that demonstrate severe and/or consistent weaknesses in the four areas receive a grade of D+ or lower.

Currently, the data show that the U.S. government does not fall into either category. It ranks …

•   extremely low in terms of its debt burden (114% of GDP);

•   very low for international stability, due mostly to low reserves; and

•   also low for economic health because of recent boom-and-bust cycles.

Helping to partially offset these low scores, however, the United States ranks high for its ability to borrow in the global marketplace, raising its final grade to C-.

The C- grade is near the bottom of the Weiss secure category and only one step above our vulnerable category (equivalent to “junk” in the ratings scale of the Big Three).

And it indicates grave risks for policymakers: Should the U.S. government fail to make significant changes in a timely manner, a further deterioration in the nation’s finances could trigger a series of events beyond its control.

These could include …

•   significant further reductions in the U.S. dollar’s role as a reserve currency,

•   spreading reluctance by global investors to buy U.S. government securities,

•   and investor outcries for draconian cutbacks in government spending.

These, in turn, could bring about a vicious cycle of economic declines, larger deficits and further investor demands for even greater cutbacks, much as we have seen in Europe.

What are the risks for you?

The most immediate risk is falling market prices, especially in medium-term Treasury notes and long-term Treasury bonds.

U.S. bond prices could fall not because of inflation and rising interest rates, but also because of increasing global uncertainty about the credit quality of U.S. government securities.

That means higher interest rates across the board — for mortgages, auto loans, student loans, credit cards and more.

And it means that any recovery in housing could quickly fade.

In addition, global investors face the rising risk of losses stemming from a depreciating U.S. currency — a depreciation that’s caused, to a large extent, by the U.S. government’s own efforts to finance its deficits with borrowed or “printed” money.

Governmental and International Organizations Support 
Our View That U.S. Merits a Much Lower Credit Rating!

Although our opinion of U.S. sovereign debts squarely contradicts the AAA/Aaa rating assigned by the Big Three agencies, it is firmly supported by a large body of research published by governmental and international organizations. For example …

CBO warns of sudden fiscal crisis
CBO warns of sudden fiscal crisis

CBO: In its report of July 2010, for example, the Congressional Budget Office (CBO) warned of the unsupportable nature of U.S. debt and the rising chance of a sudden fiscal crisis:

“Over the past few years, U.S. government debt held by the public has grown rapidly — to the point that, compared with the total output of the economy, it is now higher than it has ever been except during the period around World War II. …

“Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels. …

“[A] growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. …

“If the United States encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation. …

“Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States; in particular, there is no identifiable tipping point of debt relative to GDP indicating that a crisis is likely or imminent. But all else being equal, the higher the debt, the greater the risk of such a crisis.”

Budget Commission: Five months later, in December 2010, the National Commission on Fiscal Responsibility and Reform gave additional weight to the CBO’s warnings in its final report, The Moment of Truth.

In it, they wrote:

“The problem is real. The solution will be painful. There is no easy way out. Everything must be on the table. …

“America’s long-term fiscal gap is unsustainable and, if left unchecked, will see our children and grandchildren living in a poorer, weaker nation. …

“The contagion of debt that began in Greece and continues to sweep through Europe shows us clearly that no economy will be immune. If the U.S. does not put its house in order, the reckoning will be sure and the devastation severe.”

IMF

IMF: The International Monetary Fund (IMF) has also issued sharp warnings to the United States government, among others, that it must tackle its huge budget deficit.

Otherwise, warns the IMF, the U.S. could find itself embroiled in a sovereign debt crisis, including wholesale dumping of U.S. government securities by global investors and surging borrowing costs.

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.”

Recent Analysis by Leading Private-Sector
Research Organizations Also Supports
Our Low Rating of U.S. Government 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 instance …

Jim Grant

Jim Grant: 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 unprecedented responses to the 2008-2009 financial crisis, which may expose it to significant credit risk;

•   large holdings of U.S. government debt by foreign official institutions;

•   possible reductions in the liquidity of U.S. government securities caused by a decline in the dollar;

•   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.

David Walker

David Walker: 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.

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.;

•   gives only six countries — Hungary, Ireland, Japan, Iceland, Portugal and Greece — a lower ranking than America’s.

In sum, this research supports the view that America’s AAA/Aaa rating is an anachronism — and that even S&P’s downgrade is a woefully inadequate warning of more troubles to come.

What’s Most Surprising, However, Is That …

The U.S government — despite the cliff-hanger fiscal paralysis last year in Congress and the looming “fiscal cliff” this year — still borrows money at dirt-cheap rates, as if there were no tomorrow.

And U.S. government bonds — thanks mostly to trillions in support from the Federal Reserve — are still selling at sky-high prices.

But as we’ve seen with the institutions and countries we have downgraded in the past, it’s only a matter of time before the chickens come home to roost.

Just as our low ratings for banks, insurance companies and major countries served as accurate advance warnings of future financial troubles …

Our C- rating of U.S. government debt stands as our advance warning of looming financial troubles in Washington.

Our C- rating is not a forecast of default or failure. But it does imply overwhelming future pressure on Uncle Sam to cut expenses, raise taxes and/or print money in enormous quantities.

Other Advanced Nations Are in Similar Danger!

Lowest Rated

Among the 50 countries we cover, 19 merit a Weiss Rating of C- or lower, much as the U.S. does. (C = fair, D = weak, E = very weak.)

And what’s especially surprising is that among these, the overwhelming majority — 14 to be exact — are so-called advanced nations, also including Canada, Japan, and the United Kingdom.

They have not yet been dragged into the mud like Iceland, Spain, Portugal, Ireland or Greece. But they are heading down the same wayward path.

Canada has gross public debt at an unhealthy 91% of GDP. Plus, it is overly reliant on resources, many of which are suffering from falling global demand.

And more than any other large economy in the world, its future is closely tied to that of the United States.

Japan has the biggest government debt burden of all — a whopping 256% of GDP. Although most of that is financed by domestic savings, it’s still an insurmountable drag on the nation.

The country’s traditional economic model — based on strong exports — is broken. And with a population that’s aging and SHRINKING, its domestic market is even weaker.

The United Kingdom, with government debt representing nearly 89% of GDP, sank into a double-dip recession in the first quarter of the year, while its manufacturing fell to the lowest level since the bottom of the last recession in 2009!

And I need not remind you that other major European governments have already failed, requested bailouts or are on the brink of doing so — first Greece, then Ireland and Portugal, and now Spain or even Italy.

The Outstanding Exception:
Asia (Outside of Japan)
And Some Emerging Markets

There IS a light at the end of the tunnel. But it’s not shining from North America, Europe or Japan.

Quite the contrary, it’s coming from Asian countries outside of Japan and some other emerging markets.

Look at the 10 top-rated countries we cover …

•   All merit a Weiss Rating of B+ or better. (A = excellent, B = good.)

•   And surprisingly, seven out of the 10 are in regions that used to be called “developing” — Asia and Latin America.

I’m referring to Singapore, Hong Kong, Thailand, China, Chile and more.

These are countries that typically have large cash reserves, small debt loads, strong currencies and an economy that’s not stumbling every few years from boom to bubble to bust.

Highest Rated

And in the long run, their fiscal stability almost always pays off. Right now, for example …

Singapore merits the highest Weiss Ratings — A+. It is expected to grow by a better-than-expected 3%, led by construction that’s expanding 6.2%.

Hong Kong, although politically a part of China, is tracked and rated separately, earning a Weiss Rating of A. Its taxes are low. Its legal structure is modern. And it has the dual advantage of being relatively open to Western capital, while also acting as the place for listing Chinese companies.

Thailand gets a Weiss Rating of A — and not just because its government debt is only 44% of GDP. Its economic growth is stable and high, expected to grow by about 5.7% this year. Just in May, for example, its industry grew more than twice as fast as analysts expected.

China gets an A-. Despite a recent softening in its high growth, its gross government debt is only 33% of GDP — and it still has the biggest cash reserves of any country in the world.

Chile merits a B+. Its gross government debt is one of the lowest in the world — less than 11% of GDP. Its currency is very stable, its economy slowing a bit but still growing steadily.

Plus, two other emerging market countries — South Korea and Malaysia — also merit a B+ for their moderate debt loads, stable currencies, economic growth, among the many factors we evaluate.

Your Action Plan Should Be Obvious

First, seek to unload stocks and bonds that may be vulnerable to a debt collapse and recession in the countries receiving the lowest Weiss Ratings.

I say that even if their economies have traditionally be viewed as more “advanced” or “developed” … and even if they still boast relatively high ratings from S&P, Moody’s or Fitch.

Second, if you are unable or unwilling to liquidate some of those assets, seek to hedge against their decline with bear investments — inverse ETFs or long-term put options that are designed to go UP if your assets go down.

Third, start thinking more seriously about diversifying your portfolio to countries meriting the highest Weiss Ratings, even if they have traditionally been viewed as less advanced or less politically stable. The hard numbers show that those old precepts may be dead wrong.

Naturally, if global stock markets sink, these emerging markets are also bound to suffer a correction. But that will merely mean you can get an even better bargain!

Bottom line: The growing schism between weak “advanced” countries and strong emerging market economies opens up a profit opportunity in two ways — first, big bargains in the near term, and then, major growth opportunities soon thereafter.

Good luck and God bless!

Martin

D. Weiss Ph.D.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.


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