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INCRA ratings: US receives top marks, growth in eurozone remains fragile

Despite a weak first quarter, Germany, Italy and France will continue to grow in 2015. That is one of the findings from the new INCRA country ratings released by the Bertelsmann Foundation North America. In contrast to the situation in the United States, however, considerable downward risk exists, not least because of Greece's ongoing debt crisis.

The International Non-Profit Credit Rating Agency (INCRA) initiated by the Washington, DC-based Bertelsmann Foundation has found that the US will most likely be a more reliable motor for the global economy in coming years, with expected growth in the US of 1.5 to 3 percent in 2015 and 2.5 to 3 percent in 2016. Despite fluctuations in the country's growth from quarter to quarter, INCRA raised its rating for the US from AA+ in its 2013 report to a current AAA. Low energy prices and a higher employment rate are providing a stable basis for the US economy's future growth.

INCRA's ratings of sovereign debt are based on forward-looking indicators in addition to traditional macroeconomic data.  These indicators are highly qualitative and take into account crisis management, each country's ability to carry out reforms, and investments in education and infrastructure, among other factors.

Other results for the eurozone:

  • Domestic demand remains the main growth factor in France, Germany and Italy. In Germany, domestic demand has benefited from higher wages, an increase in gross fixed capital formation and ongoing export growth, all of which will boost overall growth in 2015. In France and Italy, initial hopes for additional momentum in 2015 from foreign trade have not yet been fulfilled.
  • Despite the latest monthly figures and in contrast to often expressed fears, especially in Germany, the problem in the eurozone is not inflation as much as it is a general lack of inflation. The Italian consumer price index increased minimally in 2014, namely by a mere 0.2 percent. In Germany and France as well, inflation remains significantly below 2 percent, the target set by the European Central Bank.
  • Unemployment among the young is a major challenge in France and Italy. While high unemployment rates are generally a source of concern in Europe, the jobless rate in Germany has reached its lowest level in the last 20 years. Germany's youth unemployment rate is the second lowest in the world.   
  • Germany, France and Italy are at considerable risk when it comes to contingent claims, i.e. possibly having to rescue other states or banks in the eurozone. The banking sector in France, the weaker of the eurozone's core members, faces negative repercussions in particular should the country have to participate in future rescue measures. At the same time, a possible spillover of Greece's debt crisis continues to undermine investors' trust in Italy.

Country-specific observations:

  • Germany: Social security systems are the only noticeable exception to the country's otherwise positive forward-looking indicators. The country report concludes that time is running out for Germany to initiate the difficult process of reforming its system of entitlements.
  • France: The largest structural risks are France's inflexible labor laws and the limited social mobility resulting from the differences that persist across class and educational divisions. The report sees a lack of political will for implementing the necessary changes, despite current attempts at reform.
  • Italy: Although Italy's fiscal consolidation has produced impressive results in recent years, the country's debt level remains disturbingly high. The resulting annual amortizations require uninterrupted access to the markets. It is difficult to predict what the impact on Italy would be if Greece declares bankruptcy.
  • United States: Strong growth rates in the US have not only led to improvements in the labor market, they have virtually eliminated another problem: the federal deficit, which fell in the 2014 fiscal year to 2.8 percent of GDP, thereby reducing the overall deficit at least temporarily.

The Bertelsmann Foundation launched the International Non-Profit Credit Rating Agency in light of the 2008 financial crisis and the resulting criticism of leading credit rating agencies and their practices. Published in 2012, INCRA's initial report included a description of the agency and the first country reports. The Bertelsmann Foundation firmly believes that INCRA provides superior ratings, since they include numerous macroeconomic and forward-looking indicators that specifically reflect each country's socioeconomic development. Moreover, the INCRA model makes the rating process more transparent. INCRA's legal and organizational structure is designed to avoid the conflicts of interest associated with the leading credit rating agencies.

Note: The sample INCRA ratings are not commercial ratings.