Barclays has unveiled a brand new index of sovereign debt risk across countries.
Here’s how countries line up in their Fiscal Vulnerability Index:
The US is right near the middle, as several countries including Korea, Russia, Brazil, and Mexico are deemed to be stronger on their index.
Obviously, the US’ sky-high debt is the real culprit in Barclays’ view, though on net they see the US as being more strong than weak, so you can take heart in that.
But why the US isn’t weak is what’s interesting.
“Institutions” are key in keeping several developed economies such as the US, the UK, and Japan from dropping below the middle of the ranking table. Indeed, because of their high debt-to-GDP ratios, both the US and Japan would have scored worse had we not given them a higher debt sustainability threshold of 90% to account for their “safe-haven” status. These countries have issued all of their public debt in local currency, and their interest rates tend to fall in times of global or domestic turmoil.3 The low score on our Fiscal Vulnerability Index driven by fundamentals means that the US and Japan are now much more reliant on the market’s respect for solid institutional frameworks to retain their “safe haven” status. Interestingly, institutions also explain the large contrast between solvent emerging and more fiscally vulnerable developed nations such as China and the US, as highlighted in Figure 5.a.
In other words, the US is a sound and stable democracy, and sound and stable democracies don’t have credit crises.
We pointed this out the other day, when looking at the history of hyperinflation scenarios: It really only happens in deeply corrupt, war-torn states.
This dovetails nicely with Michael Lewis’ latest on Greece, which, as Felix Salmon points out, puts a lot of blame on corrupt Greek culture (which, for what it’s worth, is definitely not a new line of thinking on the Greece crisis).
So if you’re going to look for a catalyst of a US debt crisis, don’t look at our nominal debt levels — look at evidence that our institutions are coming apart. Look at cultural things like the fact that we’re freaking out over a mosque or a book burning — signs that our economy is becoming unglued over really, really trivial stuff. When there’s chatter that the President of the United States might call the pastor, it’s hard to feel real confident that American institutions represent the rock-solid stability you thought they did.
That’s why you should start to get worried.