If you prick a sovereign, why do they not bleed? | FT Alphaville

If you prick a sovereign, why do they not bleed?

You all know we’re absolute suckers for anything with ‘sovereign vulnerability’ stamped all over it. So…

… Presenting Rabobank’s latest Sovereign Vulnerability Index:

Yeah, the US and Japan are pretty prominent. But before we get the inevitable counterblast from aficionados of Modern Monetary Theory — Rabobank’s analyst, Shahin Kamalodin, acknowledges that the index excludes important ‘soft fundamentals’, such as the United States’ ability to print fiat dollars to finance its debt. At the same time however, Rabobank has opted not to count in explicit contingent liabilities, which are huge and rising for the US. Hence it’s interesting that even without them, the US looks pretty bad!

Instead the index focuses on ‘mechanical’ criteria including interest payment burdens and debt maturities. Even on this basis, Greece is pretty much doomed due to low growth, high interest, high debt levels.

Although going back to the Exorbitant Privilege dollar-printing thing…

Rabobank’s ‘mechanical’ criteria also include a great attempt at empirically measuring sovereign reputation:

The WGI [World Governance Indicator] of the World Bank captures six key dimensions of governance between 1996 and 2009. The reason why the WGI is added to the SVI is because it is considered a proxy for the government’s credibility, ability and willingness in carrying out the needed measures to restore order to its public finances. For example, this indicator may capture the fear of investors concerning ‘untrue’ official statistics and/or the power of the state to fight tax evasion.

Again, Greece doesn’t look good — something about lying about deficit numbers, if we remember correctly. (Plus tax avoidance remains rife in the country.)

But surely you can turn the willingness issue on its head.

The US is able to print dollars to fund itself. Whereas it’s usually good if a sovereign shows it’s willing to do anything to ensure it’s solvent, we do wonder how willingness to trash the planet’s faute de mieux reserve currency would be received in world markets. The dollar is a Keynesian beauty contest, not an immutable world hegemon, and there’s no necessary reason why the US would get off scot-free in a crisis when there are plausible alternatives out there.

It’s the same kind of issue surrounding the astonishing situation the US Congress is in now, where some idiots are willing to default ‘to teach a lesson’ despite ample, gigantic, ability to service debt. It’s a bit like the Ecuador default of 2007, where they just declared the debt odious.

Ability, in short, just ain’t willingness. When the debate is full of those hooting with not a little hubris that the ratings agencies are ‘tugging on Superman’s cape’, we’d hate for this to be forgotten.

Although we’d welcome that (persuasive) counterblast…

Related links:
The WGI – methodology and analytical issues – SSRN
The crisis of the flight to safety crisis – Paul Kedrosky
US Treasuries – they are a-changing – FT Alphaville
On monetary restandardization – Unqualified Reservations