Top 12 Countries Most Likely To Go Belly Up

Risk analysis firm Maplecroft just released its new fiscal risk index ranking of 163 countries. Europe trumps all other regions with 11 out of twelve courtiers rated as “extreme risk.” However, quite surprisingly, only one PIIGS country–Italy which takes the top spot–is in the top 12.

The others include many big economies in Europe - Belgium (2), France (3), Sweden (4), Germany (5), Hungary (6), Denmark (7), Austria (8), United Kingdom (10), Finland (11) and Greece (12). Japan at No. 9 is the only other country not in Europe within the highest risk category (See map below).
Aging Demographic
While high national debt and public spending are two common denominators, the study finds it is the aging demographic that puts these countries at extreme fiscal risk. An aging population will place increasing pressure on public expenditure such as pension and health care, while a shrinking working-age population means less productivity and less tax revenues to support public spending and debt payments.
High Dependency Ratio
Aging population also leads to high dependency ratio, or the number of people 65 and older to every 100 people of traditional working ages. For example, according to Maplecroft, that ratio in France is 1 to 47 (i.e. 47%), Germany at 59%, Italy with 62% and Japan at the very top with 74%. The ratio in UK is currently 25%, and is forecast to rise to 38% by 2050.

Low Senior Labor Participation Rate

Another problem within Europe is that it has a low labor participation rate in the 65+ age bracket. In fact, the labor market participation of age 65+ amongst the ‘extreme risk’ nations ranges from 1.4% in France, 7.71% in UK, to 11.7% in Sweden, vs. a 28% average across all countries ranked in the index.

U.S. – High Fiscal Risk
Although the United States is not ranked among the “extreme fiscal risk,” the country is nevertheless classified as “high risk”, along with Spain, also a member in PIIGS, Australia, Canada, and Russia.
Let’s take a look at the two metrics mentioned here.
The dependency ration in the U.S. is 22 in 2010, but is projected to climb rapidly to 35 in 2030, according to the U.S. Census Bureau, mainly due to baby boomers moving up into the 65+ age bracket. The ratio then will rise more slowly to 37 in 2050.
The labor participation for age 65 and over in the U.S. is at 17.5 according to data at Bureau of Labor Statistics (BLS). This is better than most of the European countries, but below the overall average of 28%.
Wave II To Include U.S.
Most people typically associate country’s fiscal risk to the government’s monetary and fiscal policies and Lehman Brothers has taught us that banking and housing crisis could push the entire world into the Great Recession. While these are definite risk factors, a highly productive labor force and relatively young population makeup tend to mean sustainable prosperity and better odds at climbing out of a hole.
The Maplecroft study concludes:

“…in high risk countries, it is increasingly likely that the private sector will be called upon to contribute in the form of pensions and private health care…. Without significant adjustments, such as raising taxes or reducing spending, countries risk going bankrupt.”

Meanwhile, the fact that U.S. dollar actually went down during this crisis in Libya and Egypt is very telling regarding the diminishing safe haven status of the dollar as well as the United States.

So, while widespread protests are still going on in Europe over pension age being raised and many austerity measures, amid the European sovereign debt crisis, the U.S. and other countries in the same “high fiscal risk” seem to be set for the wave II of this global fiscal chain of events.