US Treasuries are called the “risk-free assets” of the financial world. However, the moniker of “risk-free asset” may actually belong to another country.
Currently, the market has designated five countries whose sovereign debts are more creditworthy than the US. The creditworthiness in this case is determined by the 5-year sovereign credit default spreads (seen in the chart below from RBC Capital Markets).
The five countries, ranked in the order of credit worthiness, are Norway, Canada, Sweden, Switzerland, and Germany.
Ranked behind the fifth-place US are Australia, UK, China, Brazil, Russia, Japan, and Mexico. This illustrates that the US is still more creditworthy than booming emerging market countries like China and Brazil.
Down at the very bottom are heavily indebted peripheral European countries like Greece and Portugal.
When one compares RBC’s rank to a rank of simple debt metrics – like the budget deficit or public debt to GDP – the correlation is weak except for the most indebted end of the spectrum, so public finances alone can’t tell the whole story.
What distinguishes the best five – Norway, Canada, Sweden, Switzerland, and Germany – is probably the political stability and commitment to fiscal discipline seen in these countries.
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