Such an approach is sorely needed, in our opinion. Past sovereign debt crises had more to do with structural rigidities (fixed exchange rates, etc.), bad politics (an inability to make tough decisions, etc.), and severe shocks (wars, etc.) than with headline debt and deficits. Indeed, war is by far the most common cause of past sovereign defaults in our developed world sample. Our attempt at scoring yields the following conclusions about relative debt sustainability:

- The first tier of sovereign debt includes the liabilities of China, Germany, Switzerland, Australia and Canada. More controversially it also includes the US, Italy and Japan. In our view these countries have negligible credit risk. These countries may (and probably do) have some unsustainable liabilities,
but for most this implies much longer-term risks of inflation (indirect default) if action is not taken to cap or reduce long-term entitlement commitments.

- The second tier includes the UK and arguably France. Credit risk remains very low for these two, but structural factors suggest slightly greater risks of
debt sustainability issues. For the UK these are most likely to show up in higher inflation risks; for France the main concern is public sector rigidities
and entitlements.

- The third tier includes Greece, Portugal, Spain and Ireland. For these four the risks of actual default are significantly greater, unless and until rules for a
more explicit fiscal and political union within the euro zone are worked out. This process has now begun in a classic process of crisis-led reform.

- Note that the euro zone GDP-weighted average score is similar to the UK score. Moreover, all countries in our sample – no matter what their debt level would be perfectly creditworthy if primary budget surpluses were the norm.

Naturally, our conclusions rely on many subjective judgements. The framework is available in spreadsheet form on request, allowing readers to put in their own country scores and category weightings.

Read the Full Report. (pdf)