When it comes to sovereign nations, Ecuador has filed for bankruptcy the most times. Brazil, Mexico, Uruguay, Chile, Costa Rica, Spain and Russia have all filed for bankruptcy nine times in the same period. These seven countries have instilled relatively little confidence among investors. However, Moody's improved Jamaica's credit rating this year and the credit ratings of Argentina and Belize remained stable. The remaining four countries were downgraded.
High levels of debt, which is not always a sign of an unhealthy economy, can also contribute to a country's poor credit rating. The debt of four of the seven countries was equivalent to more than 75% of their Gross Domestic Product (GDP). In Jamaica and Greece, the debt far exceeded 100% of GDP. Political conflicts have also weakened some of these economies, creating more uncertainty and greater risk. For example, Ukraine's conflict with Russia over the annexation of Crimea and the subsequent US, US and European sanctions have contributed to the country's downgrade in March.
Foreign investment is vital for most countries, especially developing countries. To attract investors, countries use a variety of strategies. Often, they issue bonds in other, safer currencies to be more competitive in international bond markets. Countries such as Argentina, Jamaica, Belize and Ukraine have issued bonds in other countries' currencies. The inflation rates of common currencies like the dollar, yen and euro are usually much lower and more stable than the currencies of the issuing countries. This means that investors don't have to worry as much about their investment losing value.
These are the seven countries at risk of default. In April, Moody's downgraded the rating of Belarus's sovereign debt from B3 to Caa1. Belarus is one of only seven countries with a credit rating worse than B. Ratings C and worse are associated with relatively high levels of uncertainty and creditors can expect a recovery rate of 90 to 95%, the expected percentage of capital and interest returned to lenders in countries with CaA1 ratings. While Jamaica's credit rating (Caa2) is one of the worst, it is a recent improvement over its Caa3 rating. Moody's also raised the country's outlook to positive in May.
No other country with such a poor rating has a positive outlook. Jamaica recently simplified its tax returns, reformed tax incentives and implemented a minimum business tax. According to Moody's, the improvement of the business climate supports private investment and confidence in the economy. Ukraine's conflict with Russia over the annexation of Crimea continues to fuel its financial problems. Although the International Monetary Fund (IMF) approved Ukraine's debt restructuring plan in March, Ukraine has the worst credit rating of all the countries analyzed and this year it lowered it from CaA3 to Ca, the second lowest possible level.
Creditors can expect a recovery rate of 35 to 65% on loans issued by Ukraine. According to Moody's, there is practically a 100% probability of a struggling stock exchange and therefore a default on public debt on the same day that Moody's issued its downgrade. The National Bank of Ukraine announced the creation of the Financial Stability Council on that day as well. According to Valeriia Gonatreva, Governor of the National Bank of Ukraine, the Council will adopt a comprehensive and systemic approach to identify and mitigate risks that threaten Ukraine's banking and financial systems. Companies based in other countries but with large parts of their operations in the US suffered in similar ways. In these countries there are no out-of-pocket costs for health care so there are no bankruptcies caused by medical debts.
