Forum - Introduction to SWI

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Overview > Sovereign Credit Ratings > Sovereign Wikirating Index (SWI) > Introduction to SWI
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The Sovereign Wikirating Index aims at providing a basic but transparent and understandable credit rating method for sovereign credit ratings.

The SWI uses the following 5 criteria (with weights):

The resulting value is adjusted by multiplying it with a Scaling factor, which is composed by the Human Development Index (HDI)[1] (60% weight), the Corruption Perceptions Index[2] (20% weight) and the Political Instability Index[3] (20% weight).

Calculations

Each criterium is calibrated with respect to the relative minimum and maximum value of all countries. For some criterium a threshold value is defined in order to avoid distorted values. The calculated values are done with a spreadsheet (wr_swi_method+data_2011-09-26.xls).

List

Please use this forum to discuss about the SWI and to provide your feedback and ideas for enhancement

thank you --~~~~Erwan

References

Posted by on 7 October 2011 at 06:42.
Edited by on 7 October 2011 at 13:42.
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Hi guys,

Nice initiative. You are maybe missing something with your SWI: you might want to add a criteria for the population growth. Indeed, the U.S. for instance might have less problem to re-reimburse the debt in the middle and long term than the German for instance, who have a low birthrate.

Also I suggest you to explain the weight you give to each criteria. For instance, one could construct your SWI method on a MIMIC model based, where the index could be defined and valued as latent variable

Just a though

Cheers Pete

Posted by on 11 October 2011 at 12:02.
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Hi Pete

thank you very much for your input! Good arguments, we will try to take these points into consideration asap. What certainly will be introduced soon is a certain kind of "approval board" for such suggestions/ideas.

Cheers Dorian

Posted by on 24 October 2011 at 11:57.
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Hi evrybody, I think it is essential to implement the "explicite" and the "implicite" debts to judge future developments. Why: Italy: explicite debt in % of GDP 115 %, implicite debt ~ 40 % of GDP France: ~ 85 %, ~ 613 % USA: ~ 659 % To me it looks like USA and UK have a pretty dim future compared to Italy regarding future. I am not a financial expert (as so many others) but I have some good common sense. And I stongly believe that these numbers do have a heavy impact on a rating. Sources are: http://www.risknet.de and http://www.nzz.ch I do not use american sources because I found some 100% opposed, so not trustworthy. Best regards Siegfried ~

Posted by on 12 December 2011 at 20:26.
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Sorry, some numbers above got lost. It's

Italy: 115% and 40 % France: 85 % and 260 % UK: xx% and 613% USA: xx% and 659 %

With 659% of GDP implicit debts coming + the exorbitant explicite debts still increasing, I doubt the US can handle that. Surely not, as long as presidential election-cabaret is ongoing, which is an other criterium needed to be includet in a rating evaluation. So what's the US rating ? Still AAA- ?

Sorry for the mistake above

Siegfried

Posted by on 12 December 2011 at 20:44.
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Hi Panamaracuya,

Thank you for your input. You are right, making the distinction between explicite and implicite debts makes much sense. We'll try to implement this into our SWI method. In the meanwhile we have created [new discussion thread] for this topic

Thanks Erwan

Posted by on 13 December 2011 at 17:37.
Edited by on 15 December 2011 at 13:34.
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I agree that you should consider "implicit debts" such as unfunded pension liabilities when constructing the index.

Also, thanks for Wikiratings and the SWI!

I do not think there is a strong case for some of the determinants in the SWI - such as Inflation or the HDI.

Since inflation reduces the real value of government debt, it may actually have an inverse relationship to default probability. On the other hand, the inflation itself could be regarded as a subtle form of default and it does lead to higher interest rates and ultimately higher debt service costs. All this considered, it is not clear how inflation affects sovereign credit.

It is hard for me to see the causal relationship between some components of HDI and government solvency. While happiness, gender equality and press freedom are all nice things, it is not clear to me how they affect a nation's willingness and ability to pay its bills.

I agree that some kind of scorecard/quantitative approach is a useful alternative to rating agency subjective judgments. I also believe that a quantitative approach has to have a strong empirical foundation. My own research leads me to believe that advanced economy government defaults are primarily the result of unsustainable levels of debt service. Measures that directly incorporate current debt levels and potential future debt levels as well as the progression of interest rates, should dominate any index.

Posted by on 10 February 2012 at 05:39.