Independent Sovereign Rating: Further Reforms are Needed to Secure Japan's Credit Rating
BERLIN, WASHINGTON D.C., GÜTERSLOH, Germany, November 20, 2012 /PRNewswire/ --
Bertelsmann Foundation presents new rating model with international examples - Japan burdened by high debt and demographic change
Japan continues to enjoy a high credit rating in international sovereign ratings. However, in order to retain this reputation, the country requires a range of social and economic reforms. This is the conclusion of the feasibility study of the first independent and non-profit-oriented sovereign rating system, which was compiled by the Bertelsmann Foundation, a renowned German think tank, and which has very recently been presented in Berlin.
As well as the traditional macroeconomic indicators, this sovereign rating system included additional outlook indicators in the analysis, in collaboration with international rating specialists. These include countries' crisis management capabilities, investments and the development of future resources or the implementation of necessary structural reforms. To illustrate how this International Non-Profit Credit Rating Agency (INCRA) works, the credit rating of five selected countries was calculated for the new study using the new set of indicators.
The new ranking method gives Japan a credit rating of 6.0 (on a scale of 0 to 10). This corresponds approximately to a score of A- awarded by traditional rating agencies. Comparatively, this places Japan slightly higher than before. The greatest problem was found to be primarily the country's high level of debt, which at 230 percent of GDP is the highest in the world, and also results in a lowering of the score according to this ranking system. In particular, due to demographic change in Japan, the authors of the study conclude that: "Over time, as the country's population continues to decline and age rapidly, and as the debt continues to build, there is likely to be a point in time when financing the huge debt load will prove challenging. The risks facing the government appear to well-justify our scores."
As well as Japan, Germany, Brazil, France and Italy were also investigated as part of this feasibility study. In the overall assessment, Germany was awarded a credit rating of 8.1 by this independent rating system. On the traditional rating scale of the commercial rating agencies, this corresponds to one of the highest possible gradings (AAA negative outlook). Of all the euro zone members, the country has therefore weathered the crisis the best so far. Nevertheless, risks were identified in three areas in particular. These are the liabilities that Germany has incurred for its European neighbours, its high government debt of over 80 percent and its negative demographic change. After Germany, France received the best credit rating of 7.9 (or AA+), followed by Italy at 7.2 (equivalent to AA-). The report assessed Brazil's creditworthiness as 6.8 (A+) and Japan's as 6.0 (A-).
With regard to Italy, the score using this model differed significantly from that of the leading rating agencies and gave a much more positive evaluation of the country. This is partly the result of the country's crisis management capabilities. France's score continues to be strong, although the reforms under President Hollande, such as the lowering of the retirement age and the country's increasing debt burden could lead to a fall in the score. Development in Brazil is also being monitored. The country must make urgent investments in education and infrastructure to stop the decline in the growth rate.
The sovereign ratings presented by the Bertelsmann Foundation are the second stage of a feasibility study for an independent sovereign rating system. The Foundation's intention with this system is to provide an alternative to the traditional rating agencies such as Moody´s, Fitch and Standard & Poor´s, whose ratings were strongly criticized in the context of the international financial and euro zone crisis. The Foundation sees the most significant advantage of this independent sovereign rating system as the increase in the quality of the assessments due to the fact that the socio-economic development of a country is taken into consideration in addition to the traditional macroeconomic data. It also points to the advantages of the highest possible level of transparency, as all the calculation bases are designed to be publicly accessible and comprehensible, and to the improved understanding of the scores due to the introduction of a "rating radar". The radar shows at a glance in which areas a country's macroeconomic and socio-economic strengths and weaknesses lie.
The sovereign ratings presented in Berlin are the "practical trials" of the INCRA concept introduced by the Bertelsmann Foundation in April. The Foundation itself does not aim to set up an independent rating agency. In its opinion, an organization such as the G20, the group of leading industrial and emerging countries, is the type of organization that should take forward the debate on setting up an independent rating agency.
Further information is available online at:
Executive Director, Bertelsmann Foundation Washington, DC, USA
Communications Director, Bertelsmann Foundation,
Anneliese Guess, Project Manager, Bertelsmann Foundation,
SOURCE Bertelsmann Stiftung
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