‘Political dysfunction’ in US hits sovereign credit risk

Risk1The 'political dysfunction' in the US is taking a toll on the nation's sovereign credit risk, says the BlackRock Investment Institute.

In BlackRock’s Sovereign Risk Index, which ranks 48 countries, the US has dropped to rank 15th in September, down from 14th in July last year.

The ongoing battles over the US debt limit have dented its “willingness to pay” score, a measurement of a government's perceived effectiveness that is one of numerous key metrics the index uses to assess the credit risk.

Still, the institute says the country’s overall score has been on a gradual uptrend since mid-2011 as a result of narrowing budget deficits and healthier banks.

Policy decisions by the US are affecting other countries, too. Emerging markets were “battered” after the Federal Reserve indicated that it would reduce its bond purchases, the institute says. This has raised fears of a funding crisis.

It singles out five countries that are particularly vulnerable – the “fragile five” – Brazil, India, Indonesia, South Africa and Turkey.

Meanwhile, Greece, Venezuela and Egypt rank last on the Sovereign Risk Index, while Norway, Singapore and Switzerland lead the rankings.

The index is compiled using financial data, surveys and political insights.

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