Sovereign Risk and Currency Risk Ratings by Country

by: Richard Shaw

With all the concern about European sovereign debt risk and the related currency and bank solvency issues, a ranking of non-US countries by those criteria may be helpful in thinking about non-US country ETFs. Those risk factors are only one angle on country views, but perhaps useful to some investors in conjunction with other data they evaluate.

This table of country risks factors by the Economist Intelligence Unit, obtained through Schwab, orders countries first by sovereign risk, and then within sovereign risk ratings they are further ranked by currency risk. The banking risk and an overall country risk rating are also shown. An explanation of the rating scale is provided at the end of the article. (Click charts to enlarge.)

Country ETFs in the table:

Switzerland (NYSEARCA:EWL) and Canada (NYSEARCA:EWC) have the best overall combination of sovereign, currency and banking risk. Switzerland is no surprise. Canada may not have been as obvious a top ranking to everybody, although their currency has done well versus the Dollar and their banks did not suffer as much as US banks in the recent crisis.
Sweden (NYSEARCA:EWD) and Hong Kong (NYSEARCA:EWH) are next in line with somewhat greater currency and banking risk.
Still with sovereign risk ratings like that of Switzerland, Canada, Sweden and Hong Kong; Germany (NYSEARCA:EWG) and The Netherlands (NYSEARCA:EWN) come in with somewhat more risk in the banking or currency dimension. Germany has the same banking risk level as Sweden and Hong Kong, its currency is two levels more risky due to the Euro, which is troubled by the larger European sovereign debt concerns. Netherland has the same Euro problem as Germany, but has an even greater banking risk.
China (NYSE:CAF) and Russia (NYSEARCA:RSX) have the greatest banking risk ratings among the countries.
Turkey (NYSEARCA:TUR) has the most sovereign risk and currency risk, but its banking system is one level less risky that the banking systems of China and Russia. Greece (not shown) has the same sovereign risk rating as Turkey.
United Kingdom (NYSEARCA:EWU) banking risk is at the same level as Turkey, Thailand (NYSEARCA:THD), Egypt (NYSEARCA:EGPT) and India (NYSEARCA:EPI). Brazil (NYSEARCA:EWZ) has a one level less banking risk than the United Kingdom.
Currency risk for the Euro is high and at the same level as the currencies of Russia, Australia (NYSEARCA:EWA), Brazil, Egypt, Indonesia (NYSEARCA:IDX), but not as risky as the Turkish currency.
Among others, the currencies of South Africa (NYSEARCA:EZA), Mexico (NYSEARCA:EWW) and Thailand have less currency risk than the Euro.
These sorts of matters may be secondary considerations in many cases, particularly for short-term positions, but in some cases they may be of help in providing some color to other fundamental, valuation and price pattern information.

Rating Scale:

The Economist Intelligence Unit uses an alpha rating system, which we find a bit more difficult to read in columns and harder to sort in spreadsheets, so we converted their scale to a numeric scale for our purposes. The following table presents the alpha scale and our numeric conversion, along with the explanation of each Economist rating as presented by Schwab.

Holdings Disclosure: As of January 25, 2011 we hold positions in some but not all managed accounts for the following securities mentioned in this article: EWS, EWY, and RSX.

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