Debt Crisis Update: Road ahead full of Credit Risk and Interest Rate risk

The UBS Bank in published a global review on the . The report may state the obvious but when confronted with the graphics (e.g. debt as % of GDP) we do get reminded about the severity of the situation… Are we in the clear or is a repeat of 2008 looming.

Lets look at the report’s main conclusion (download the full copy here).

First of all the report shows that the following would be more resilient in the next coming years from a credit rating perspective: Switzerland, Norway, Sweden, Finland and Australia. They would most likely keep their AAA rating (c.p.). Interesting is that 12 Countries were downgraded since 2008 with , Ireland, Iceland, Portugal and having experienced rating reductions between nine and 14 grades.

The current (blue bar) and historic (white dots) levels of Debt as % of GDP are overwhelming:

Debt levels as percentage of GDP

Secondly what is interesting about this report is the test of sensitivity to changes in interest rates. As interest rates across the globe have been reduced significantly by central banks, as a form of stimulus, we need to consider what would happen to those countries on already a tight . What whould happen if interest rates rise? Will they be able to tighten their fiscal policy even further?

Countries most affected are (on the X-axis the additional if interest rates were to rise by 1%):

Sensitivity to a country's debt levels as interest rates  rise

(note that Japan has been excluded from the chart. Japan would show that for one percentage point of additional interest cost on its 2013 gross bond issuance would translate into a burden of 1.86% of government revenues)

This report and its content are written by UBS. Feel free to leave a comment.

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