In a Global Economy Meltdown Can There be AAArated Countries?
According to S&P, the following countries have been rated AAA as of 5/8/2011 (see complete list of country ratings here): Australia, Austria, Canada, Denmark, Finland, France, Lichtenstein, Norway, Sweden, Switzerland and the UK. Now, it appears that we are all on the same boat. Because of globalization, every economy is connected to (almost) every other economy. This is what is meant by interdependency. The global economy forms a densely connected network through which information travels at the speed of the internet. So, if the economy is a global mess - we're actually talking of a meltdown, which sounds pretty dramatic - can there exist triple-A rated economies? In theory yes. In theory anything is possible, nothing is impossible. But that of course depends on the theory. But one thing is a Probability of Default (PoD) rating, like the one that Credit Rating Agencies practice, another is the resilience of an economy. Resilience is the ability to withstand extreme events, such as shocks or bursting market bubbles. In a turbulent and fragile economy, resilience is more significant than a PoD . This is because PoD computations require models and in a highly turbulent regime the conditions change so quickly and dramatically that the said models hold for a very short amount of time. When things change - and they change almost on a daily basis - the models should also change. The resilience rating of an economy can be computed on a quarterly basis - which we have been doing for over two years now - which means we can rate them very quickly. This is possible because we use a model-free method which, by definition, doesn't rely on a complex modeling process. Based on this approach, the resilience rating of some of the above countries is as follows: Austria: 2 Denmark 3 Finland 2 France 3 Sweden 3 United Kingdom 3 The resilience rating scale runs from 1 (Very Low resilience) to 5 (Very High resilience). The list of resilience ratings of the 27 EU member states is available here. Clearly, the two ratings are in contrast. Think of it this way: you can have a wonderful B.M.I. and still be severely ill.
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