NEW YORK, August 11, 2015 -- Top global economist sets out new approach to forecasting sovereign risk Nouriel Roubini, one of the few economists to correctly forecast the subprime and European debt crises, has warned that investors will continue to expose themselves to unnecessary and unexpected risks if they remain reliant on the "backward-looking" rating agencies, which he sees as being "no longer fit for purpose."
Roubini, who advised Bill Clinton and Timothy Geithner before founding the global macro research firm Roubini Global Economics, argues that ratings agencies have managed to escape any real scrutiny following the financial crisis.
He says that excessive reliance on credit ratings’ assessments of the risk of subprime mortgages was one of the principal causes of the crisis.
Roubini argues that counting on ratings agencies to measure sovereign risk leaves investors exposed to potential losses.
As an alternative, he advocates a "balance sheet" approach to measuring a country's investment attractiveness—assessing its strengths and weaknesses in the same way that one would scrutinize a company's financial statements.
This approach, Roubini maintains, gives investors a long-term and holistic view of both macro-economic factors and socio-economic indicators, including social inclusion, demography and capacity for innovation.
Roubini points to a number of examples highlighting how a systematic and data driven approach to measuring the macro risk of investing in a country would have given investors a much clearer picture than relying on rating agencies.
- Brazil should have been downgraded below investment grade last year, as the economy struggled with a widening fiscal deficit, a growing debt burden and a weak and worsening business environment.
- Hungary presented investors with an opportunity that many missed as they waited for credit rating agencies to upgrade Hungary to investment grade. The country should have returned to investment grade in 2013 following substantial improvements in the national balance sheet, with both fiscal consolidation and improvements in household finances.
- In the Eurozone, Ireland and Portugal should both be upgraded following fiscal consolidation, but Greece remains a ‘basket case’.
Even with substantial reform, Greece will never be able to repay the excessive debt on its national balance sheet and will continue to rely on debt relief.
Nouriel Roubini, Chairman of Roubini Global Economics, said:
“Credit ratings are no longer fit for purpose. Since the beginning of the US subprime crisis investors have been worried that credit ratings fail to adequately and effectively measure risk.
“In practice, analysts at credit rating agencies follow developments in their country and then, if they think that a ratings change might be necessary, travel to the country to review the situation in more detail. This process means that ratings are often backward looking, downgrades occur too late, and countries are typically rerated based on when analysts visit, rather than when fundamentals in the countries change.
“In order to comprehensively assess the macro risk of investing a country, investors need to look systematically at the stocks and flows of the national balance sheet to capture the entire liabilities of the country, including risk in the financial system and the wider private sector, as well as wider risk issues.”
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About Roubini Global Economics
Founded in 2004 by economist Nouriel Roubini, Roubini Global Economics is an independent, global macroeconomic research firm. The firm’s research combines expert insights with systematic analysis to translate economic, market and policy signals into actionable intelligence for a wide range of financial, corporate and policy professionals. This holistic approach uncovers opportunities and risks before they come to the attention of markets, helping clients arrive at better decisions in a timelier manner. Roubini Global Economics is headquartered in New York, with offices in London and Singapore.
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