S&P Rates "Most Vulnerable" Nations

From Staff Reports

Latvia, Iceland, Bulgaria and Turkey could be among the nations hurt the most if the global credit crunch continues to escalate, said a new Standard & Poor's Inc. ranking of 15 countries from Eastern Europe, the Middle East and Africa.

S&P's so-called "Liquidity Vulnerability Index" tries to measure the sovereign vulnerability of emerging economies to negative market conditions - which, in this case, is the deepening global credit crunch. According to the new report, the five most-vulnerable countries are Latvia, Iceland, Bulgaria, Turkey and Romania.

What started as a housing slump in the United States exposed the subprime mortgage crisis. And when it turned out those U.S. hedge funds - as well as banks in Germany and France, and probably others, too - had invested in the securitized versions of the subprime mortgages, meaning that it was now a worldwide problem. It's almost as if the problem started as a local or nationally regional issue suddenly became an international problem, spilling over into the global credit and equity markets, prompting many investors to slash their exposure to risky assets, including investments in emerging markets.

In contrast, the four emerging markets facing the least amount of risk are Russia, Egypt, Ukraine and the Czech Republic. Rounding out the list of the other nations that are sovereign are South Africa, Hungary, Poland, Slovakia, Lebanon and Lithuania.

"We have not, to date, changed any ratings or outlooks due to the tighter financial conditions," Moritz Kraemer, an S&P credit analyst, said in a statement accompanying the report. "Over the past 24 months, however, we have lowered ratings or outlooks for a number of sovereigns in the sample with deteriorating credit fundamentals."

The nations that are ranked as the most vulnerable on the Liquidity Vulnerability Index have suffered the largest changes in outlooks or negative ratings in recent months, but placing a country in the vulnerable group doesn't necessarily predict negative rating action, S&P said.

"Everything depends on the policy reaction by the authorities," Kraemer said.

"Indeed, Standard & Poor's last week affirmed the ratings and stable outlook on Turkey, despite the country's well above-average vulnerability to changes in market sentiment."