Corrections & Clarifications: An earlier version of this story misstated the location of Belize.
After years of bitter court battles with creditors, Argentina has defaulted on its debt, according to rating agency Standard & Poor’s. After failing to come to an agreement with creditors from its previous default in 2001, the country missed necessary bond payments on July 31, triggering the default announcement. As of publication, other organizations, most notably the rating agency Moody’s Investors Service and the International Swaps and Derivatives Association, a derivatives trade group, have yet to release public statements confirming the default.
Argentine President Cristina Fernandez speaks at Casa Rosada Presidential Palace in Buenos Aires after the collapse of debt talks with U.S. creditors.
(Photo: Victor R. Caivano, AP)
Argentina is not the only country that has struggled, or even failed, to pay its debt in recent years. It is hardly the only country with a severely impaired credit rating either. Alongside Argentina, Moody’s currently lists 10 other countries with a rating of Caa1 or worse. A Caa1 rating is several notches below Ba1, which still carries substantial credit risk. Based on ratings from Moody’s Investors Service, these are the 11 countries at risk of default.
The countries with the lowest credit ratings significantly differ from one another. They span the globe, ranging from Greece and Ukraine in Europe, to Pakistan in Asia, to Ecuador, Venezuela, and Belize in the Americas.
These nations also suffer from vastly different problems. Some nations, such as Ukraine and Egypt, owe their recent downgrades to political conditions. Others, such as Belize and Ecuador, have actually been upgraded in recent years based on their improved financial positions.
When a government has a great deal of debt relative to the size of its economy, its credit rating may also be lower. Three of the nations potentially at risk of default had among the world’s highest debt levels, at 120% of GDP or more based on 2014 estimates. According to the International Monetary Fund (IMF), Greece’s debt is projected to hit nearly 175% of GDP by the end of this year, more than that of any other nation in the world except for Japan.
However, not all countries with low ratings necessarily have a large amount of outstanding government debt. For example, Ecuador’s government debt, according to the IMF, was forecast to total just 24.8% of GDP in 2014 — an exceptionally low amount. In many cases, these countries simply do not regularly access international bond markets, either because of small financial sectors or because of debt-restructuring agreements.
Borrowing funds in the international bond market can be quite expensive for countries with poor credit ratings. Countries have to pay high interest rates on their debt because because investors require greater returns on what they perceive to be riskier investments. For example, a 10-year U.S. Treasury Note pays an annual coupon of just 2.5%. By contrast, a comparable bond recently issued by Jamaica pays out 7.65% a year. In Greece, yields on 10-year government bonds reached 29% in early 2012, right before the country defaulted.
Often, countries that tap into international bond markets do so in other currencies. For example, nations such as Argentina, Jamaica, Belize, and Ukraine have all issued bonds in other nations’ currencies. The main reason to use common currencies — such as the dollar, yen, and euro — is that their inflation rates are typically far lower than the currencies of the issuing countries. This means that investors do not need to worry as much about their investment losing value.
In fact, inflation is a major problem in several of the countries with the worst credit ratings. In one such nation, Venezuela, inflation is expected to exceed 50% in 2014, according to the IMF. Argentina’s inflation rates are likely much higher than reported by government statistics on consumer prices, which were long considered highly unreliable.
Based on credit ratings provided by Moody’s Investors Service, 24/7 Wall St. reviewed the 11 countries with credit ratings of Caa1 or worse. A rating of this level indicates considerable credit risk. Because many of these nations have significant debt in other currencies or have otherwise weak currencies, we used foreign currency ratings and outlooks for these nations. Figures on GDP growth, inflation, unemployment, population and debt levels are estimates for 2014 from the IMF’s World Economic Outlook.
These are the 11 countries at risk of default.
Ecuador
> Moody’s credit rating: Caa1
> Moody’s outlook: Stable
> 2014 Gov’t debt (pct. of GDP): 24.8%
> 2014 GDP per capita (PPP): $10,492
When Ecuador last defaulted in 2008, President Rafael Correa described the nation’s debt as “immoral” and “illegitimate.” The country’s past debt sales had been tainted by corruption, Correa said at the time. Since 2008, Ecuador’s Moody’s credit rating has steadily risen, reaching Caa1 in 2012. Earlier this year, the country both bought back a substantial fraction of its defaulted debt and issued new bonds for the first time since its previous default. According to figures from the IMF, Ecuador’s economic growth has been relatively healthy in recent years. GDP grew by 5.1% in 2012 and by an estimated 4.2% last year. GDP is forecast to rise by 4.2% again in 2014.
Egypt
> Moody’s credit rating: Caa1
> Moody’s outlook: Negative
> 2014 Gov’t debt (pct. of GDP): 91.3%
> 2014 GDP per capita (PPP): $6,696
Political unrest in Egypt in recent years has made investors wary, leading Moody’s to downgrade Egyptian debt to Caa1 in March 2013. Fears were further compounded by currency devaluation as Egyptians moved their assets into U.S. dollars and out of Egyptian pounds. But despite the country’s low credit rating, yields on Egyptian bonds fell below 5% in June. This may be an indication that investors are less concerned about the risk of political instability in the country. And while its outlook remains negative, Moody’s recently praised Egyptian President Abdel Fattah el-Sisi’s commitment to reduce the government’s budget deficit in the fiscal year starting on July 1, 2014.
Pakistan
> Moody’s credit rating: Caa1
> Moody’s outlook: Stable
> 2014 Gov’t debt (pct. of GDP): 63.7%
> 2014 GDP per capita (PPP): $3,231
This April, Pakistan issued its first bond in seven years, raising roughly $2 billion in dollar-denominated debt. Pakistan has a multi-billion dollar line of credit with the IMF, but loans are conditional on the country enacting structural reforms to its economy. Pakistan was at risk of default last year until the IMF agreed to lend it money. Tax collection remains a major problem in the country. According to The Express Tribune, only roughly one in 200 citizens even files an income tax return. The country’s total debt amounts to roughly 64% of its annual GDP, even as government spending for 2014 is estimated to be among the world’s lowest, at roughly 20% of GDP.
Venezuela
> Moody’s credit rating: Caa1
> Moody’s outlook: Negative
> 2014 Gov’t debt (pct. of GDP): 51.6%
> 2014 GDP per capita (PPP): $13,531
Venezuela’s need for short term cash may lead to trouble in future years. President Nicolas Maduro’s administration plans to issue bonds through the state-owned oil company, Petroleos de Venezuela, to increase the availability of foreign currency in the country. More foreign currency may help tame inflation in Venezuela, which stood at 40.7% in 2013. However, according to Bloomberg, the rate at which the oil company is taking on debt will likely outpace oil revenues in the coming years, making it increasingly difficult to make future loan payments. Venezuela is expected to spend less than 2% of GDP on interest payments in 2014, a number that is likely to balloon if the country continues to rapidly issue debt. Venezuela also has the highest 10-year bond yields in the Western Hemisphere at 15.81% as of June 2014.
Argentina
> Moody’s credit rating: Caa1
> Moody’s outlook: Stable
> 2014 Gov’t debt (pct. of GDP): 52.9%
> 2014 GDP per capita (PPP): $18,917
Argentina’s current problems can be tied back to 2001, when the nation defaulted on about $100 billion worth of debt. While most of the nation’s bondholders at the time agreed to restructure their debt, a few investors refused. After a U.S. court ruled in 2012 that Argentina should not pay its current bondholders without paying the holdouts as well, the country has faced the prospect of yet another default. On July 30, Standard & Poor’s stated that Argentina had defaulted. Other relevant financial bodies, such as the International Swaps & Derivatives Association, are also expected to declare Argentina has defaulted. Argentina has been beset by economic problems for years. Inflation was widely-believed to be well in excess of the government’s reported rates, and Argentina has deliberately devalued its currency, the peso.
Belize
> Moody’s credit rating: Caa2
> Moody’s outlook: Stable
> 2014 Gov’t debt (pct. of GDP): 80.4%
> 2014 GDP per capita (PPP): $8,915
Belize is a tiny Central American nation with a population of less than half a million residents. The country has suffered from debt problems for years, first defaulting nearly a decade ago, after which it consolidated all of its international debts into a single bond. The country missed a payment on this “superbond” in August 2012, leading to a 2013 debt restructuring that resulted in a longer repayment time, a haircut to the bond’s overall value, and smaller payments for bondholders. Following the restructuring, Moody’s upgraded Belize’s credit rating to Caa2 with a stable outlook. The IMF projects that Belize’s total gross debt will reach 80.4% of GDP by the end of 2014.
Cuba
> Moody’s credit rating: Caa2
> Moody’s outlook: Stable
> 2014 Gov’t debt (pct. of GDP): N/A
> 2014 GDP per capita (PPP): N/A
In April, Moody’s downgraded Cuba’s credit rating to Caa2 with a stable outlook. Weaknesses cited by Moody’s at the time included “limited access to external financing, high dependence on imported goods, political transition risk, and lack of data transparency.” Recently, Russia announced it had written off most of Cuba’s debt, significantly cutting the country’s obligations. Cuba does not pay interest on its debt and its bonds are rarely traded. The IMF does not collect figures for Cuba, which is not a member of the IMF and World Bank.
Cyprus
> Moody’s credit rating: Caa3
> Moody’s outlook: Positive
> 2014 Gov’t debt (pct. of GDP): 121.5%
> 2014 GDP per capita (PPP): $24,171
In March of last year, Cyprus received a 10 billion euro loan from the IMF, the European Central Bank, and the European Commission to save its banking system from bankruptcy. Just over a year later, Cyrus returned to global debt markets, raising $1 billion in five-year bonds yielding less than 5%. This was a moderate victory for the Mediterranean island country as its five-year bond yields neared 14% in prior years. Despite rating its bonds as Caa3, the lowest rating before default, Moody’s has a positive outlook on the country. The country’s improving economic performance, coupled with historically low interest rates in other eurozone countries, will likely push more adventurous investors towards Cyprus to take advantage of higher yields.
Greece
> Moody’s credit rating: Caa3
> Moody’s outlook: Stable
> 2014 Gov’t debt (pct. of GDP): 174.7%
> 2014 GDP per capita (PPP): $24,574
Once the poster child of economic calamity, Greece’s efforts to restructure its debt and impose economic discipline are paying off. In April of this year, Greece returned to international bond markets after a four-year hiatus, raising nearly $4.2 billion in an oversubscribed issue of five-year bonds with a yield below 5%. According to Greece’s Finance Ministry, almost 90% of bonds were issued to investors outside of Greece, indicating that international investors are beginning to view Greek government bonds as a good investment. While this is good news, Greece still has more work to do. The country’s unemployment rate remains above 26% and deflation currently threatens to further depress demand.
Jamaica
> Moody’s credit rating: Caa3
> Moody’s outlook: Positive
> 2014 Gov’t debt (pct. of GDP): 133.7%
> 2014 GDP per capita (PPP): $9,256
Jamaica re-entered the global bond market in July 2014 with a bang, raising $800 million, which was well above the $500 million expected by government officials. The expanded deal indicates that investors are excited about investment opportunities in Jamaica. The country’s improving economy may explain some investor exuberance. Despite slow growth and an unemployment rate that has been consistently above 11% since the global recession, Jamaica has reduced government expenditure as a share of GDP from 38.6% in 2009 to an estimated 26.9% this year. Additionally, the Jamaican government expects its budget deficit to be nearly balanced in 2014.
Ukraine
> Moody’s credit rating: Caa3
> Moody’s outlook: Negative
> 2014 Gov’t debt (pct. of GDP): N/A
> 2014 GDP per capita (PPP): N/A
Following the ouster of President Viktor Yanukovych in February, who was a close ally of Russian President Vladimir Putin, the political crisis in Ukraine has largely escalated. In March, Russia annexed the Ukrainian peninsula of Crimea in the Black Sea, from Ukraine. Violence between the government and pro-Russian separatists has also been rampant in eastern Ukraine. Financially, Ukraine’s relationship with Russia is also complex. Russia lent its neighbor $3 billion last December, when Yanukovych still ran the country. The bond deal contained a clause triggering automatic full repayment if Ukrainian government debt exceeded 60% of GDP, alongside other conditions that have worried several debt market experts. Due to the ongoing crisis, Moody’s downgraded Ukraine’s credit rating, and the IMF excluded projections for Ukraine from its most recent World Economic Outlook report.