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Trouble in Triple-A World

Are the remaining countries with rock-solid credit scores as stable as they seem?

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Standard & Poor’s decision last Friday to downgrade U.S. debt from AAA to AA+ status was as much about politics as economics. According to the ratings agency, "the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges." 

As others have noticed, not all of the remaining 15 countries with AAA ratings exactly have their fiscal houses in order. But as long as S&P is getting into the political risk assessment game, he’s a look at the political state of play in some of the world’s most creditworthy countries.

FRANCE

Predictable is probably not the first word one would use to describe the politics of a country that has gone through five different governments since its founding. Today, even the smallest economic reforms — such as, raising the retirement age from 60 to 62, is enough to bring the country to a grinding halt as labor unions shut down the country’s businesses and transportation networks and protesters take to the streets. Maybe that’s the definition of predictability?

The country’s president has been investigated for receiving illegal campaign donations, his predecessor is on trial for payoffs to political allies, and its most prominent opposition leader is facing multiple rape charges. Meanwhile, France’s third-largest political party, which has performed disturbingly well in both national and regional elections, is the far-right National Front which wants to ban all immigration and has pledged to pull France out of the eurozone if it ever comes to power. 

BRITAIN

Britain’s decision to stay out of the eurozone, which has given it the flexibility to print more pounds if need be, is looking pretty wise these days. On the other hand, with a growth rate under one percent over the last 12 months and riots raging the capital city, Britons can’t exactly feel too secure. The country’s debt-to-GDP ratio is 80 percent, six points higher than that of the United States.

For now, Prime Minister David Cameron has been able to push harsh austerity measures meant to restore fiscal confidence through Parliament, but he’s dependent on an often uneasy partnership with the Liberal Democratic Party, which could drop its tenuous support, collapsing Cameron’s government.  The prospect of a hung Parliament so rattled currency markets last year that the pound briefly fell against that poster child of skyrocketing inflation, the Zimbabwean dollar.

Exchequer Chancellor George Osborne says he views the global debt crisis as an "opportunity" to push through economic reforms, but unless his government can deliver growth fast, the window of opportunity may be a short one.

CANADA

Want a definition of government dysfunction? How about a prime minister who, when faced with a myriad of tricky issues — an unpopular war, economic turmoil, Olympic fever — chooses to shut down the government for two months. That’s exactly what Canadian Prime Minister Stephen Harper did in early 2010, employing a time-honored Canadian political tactic known as a "prorogue" to shut down parliamentary debate. It was the third time the prime minister had employed the prorogue in as many years. One can hardly blame Harper for wanting to avoid parliamentary debate. Because of repeated votes of no-confidence, Canada has had four national elections in the last seven years.

Canada has weathered the financial crisis better than most developing world economies, though the effect of U.S. and European economic woes may force the country to revise down its growth forecasts.

GERMANY

Once touted as "Frau Germania" and the recipient of glowing comparisons to Margaret Thatcher and even Otto Von Bismarck, German Chancellor Angela Merkel, has definitely lost her mojo lately. And there’s never been a worse time for it: With Germany’s key role in the European economy, she’s arguable the continent’s most important person. But Merkel isn’t quite the strong and unbending leader as these times call for anymore: she’s changed her position from radical free trader to defender of the welfare state, from defender of the environment to champion of industry, and from nuclear cheerleader to anti-nuke activist.

Voters aren’t buying it. Her popularity is at its lowest point since 2006 and her party was trounced in recent local elections.  Most worryingly, the leader of Europe’s lender of last resort hasn’t been able to sell voters on the need to bail out Europe’s struggling economies.

LUXEMBOURG

Pop quiz: What country has the world’s largest national debt per capita? Greece? Ireland? Pakistan? Nope. It’s tiny AAA-rated Luxembourg, which boasts a debt of nearly $1.9 trillion, or about $3.44 million per capita. Granted, the country also has the second highest GDP per capita, so they can probably cover their debts right now. But given the country’s reliance on the European banking sector and investment funds — not the most stable field at the moment — who’s to say how long the duchy’s good times will last?

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