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.|