I guess its about time to rewrite the old saying; “When Wall Street Sneezes – The World Catches A Cold.” Scientist have been able to map the developed countries economic interconnection, and the result is a bit surprising. It shows that some of the smallest countries, with the lowest gross national product, has in fact the greatest potential to create a worldwide financial havoc.
“These smaller countries do not support only their local economy but are also a haven for foreign investments, as they attract funds from large countries for taxation purposes, safekeeping, etc, and a problem in such investments can easily lead to a chain reaction in other countries.”
Antonios Garas/Panos Argyrakis/Céline Rozenblat/Marco Tomassini/Shlomo Havlin
C12 - The Most Contagious Countries In The World
According to the new research paper, the phrase “When Belgium Sneezes, The World Catches A Cold,” would be more accurate. Belgium, who has been without a government for six months and has one of the lowest GDP outputs in the world, is in fact among of the nations that easily can cause a major global financial crisis. The report by IOP Science list the 12 most economic contagious countries in the world – hereby named the C12.
The new analysis of countries’ economic interconnectedness finds that some of the countries with the greatest potential to cause a global crash have surprisingly small gross domestic production.
Using data from Bureau Van Dijk — the company information and business intelligence provider — to assess the reach and size of different countries’ economies, and applying the Susceptible-Infected-Recovered (SIR) model, physicists from universities in Greece, Switzerland and Israel have identified the twelve countries with greatest power to spread a crisis globally.
The research published on Nov. 25, 2010, in the New Journal of Physics, groups Belgium and Luxembourg alongside more obviously impactful economies such as the USA in the top twelve.
Here’s the “C12″ nations:
- USA
- France
- United Kingdom
- Sweden
- Japan
- Spain
- Switzerland
- The Netherlands
- Italy
- Germany
- Belgium
- Luxembourg
Except for USA and France, they’re all – almost – equally dangerous if a crisis occurs on a national level.
Note: Six of the eight wealthiest nations in the world – G8 – is on the list.
“This is explained by the fact that these smaller countries do not support only their local economy but are also a haven for foreign investments, as they attract funds from large countries for taxation purposes, safekeeping, etc, and a problem in such investments can easily lead to a chain reaction in other countries. Countries such as Luxembourg and CH, which are the headquarters for some of the world’s largest companies and subsidiaries, interact very strongly with a large number of countries. For example, about 95% of all pharmaceutical products of the Swiss industry is not intended for local consumption but for exporting,” the scientists write.
Using a statistical physics approach, the researchers from the Universities of Thessaloniki, Lausanne and Bar-Ilan used two different databases to model the effect of hypothetical economic crashes in different countries.
The data used allowed the physicists to identify links between the different countries, by mapping the global economy to a complex network, and gauge the likelihood of one failed economy having an effect on another.
One network was created using data on the 4000 world corporations with highest turnover and a second using data on import and export relations between 82 countries.
In addition, the SIR model, successfully used previously to model the spreading of disease epidemics, is applied to these two networks taking into consideration the strength of links between countries, the size of the crash, and the economic strength of the country in potential danger.
When put to the test with the corporate data, the USA, the UK, France, Germany, Netherlands, Japan, Sweden, Italy, Switzerland, Spain, Belgium and Luxembourg were part of an inner core of countries that would individually cause the most economic damage globally if their economies were to fail.
Using the import/export data, China, Russia, Japan, Spain, UK, Netherlands, Italy, Germany, Belgium, Luxembourg, USA, and France formed the inner core, with the researchers explaining that the difference – particularly the addition of China to this second list – is due to a large fraction of Chinese trade volume coming from subsidiaries of western corporations based in China, according to the report.
The researchers write:
“Surprisingly, not all 12 countries have the largest total weights or the largest GDP. Nevertheless, our results suggest that they do play an important role in the global economic network. This is explained by the fact that these smaller countries do not support only their local economy, but they are a haven for foreign investments.”
The Big Bang of Belgium
Belgium – who now have been without a government for six months – is held up as an example.
“We find that countries in the nucleus can spread a crisis to larger parts of the world compared to countries in the outer shells, even if the crisis originates in a small country, such as Belgium.”
“Zoom of the area showing the spreading for smaller crisis magnitudes (m). The dashed line shows the spreading of a crisis originating in Belgium, which is one of the smaller countries that belong to the nucleus of the network. Note that a crisis originating in Belgium, as m gets larger, becomes more severe in comparison with the average case for all countries in shell 11, (e). Fraction of nodes infected by a crisis originating from different shells of the network versus its magnitude m for ITN, (f) Zoom of the area showing the spreading for smaller crisis magnitudes (m). The dashed line again shows the spreading of a crisis originating in Belgium.”
It’s hard to imagine, but the scientist writes that a crisis originated in Belgium has the potential to infect 95 percent of the global economy:
“Considering the example of Belgium – ranked 29th according to its total GDP – we find that a crisis originating in this country (with magnitude m = 4.5), is able to affect for CON almost 60% of the world’s countries (average result of 50 realizations), while the worst-case scenario that is given by the maximum value of the fraction of infected countries (out of the same 50 realizations) is 95% of global infection,” they write.
The Potential Impact of Belgium
This story was first published by ScienceDaily.com on November 26, based on materials provided by Institute of Physics, via EurekAlert!, a service of AAAS.
Here’s a copy of the full report, downloaded from IOP Science.com.
Related by The Swapper:
Mama Mia, We're All PIIGS Now!
The Markit iTraxx Europe hit 120 basis points for the first time since early July, the Markit SovX WE reached 209 bp’s, a new record. French CDS spreads closed above 100 for the first time, Belgium broke through 200 with Italian spreads rapidly closing in on the Spanish level around 300 bp’s.
“The sovereign debt contagion has spread beyond the eurozone’s periphery and into the club’s core.”
Gavan Nolan
Well, it seems like we’ve finally become PIIGS. all of us here in Europe. No matter how many bailouts, rescue packages and stabilizing mechanisms the political leaders come up with, the financial crisis just keeps on rolling. We’re approaching the end of 2010. The crisis have then lasted for more than two years, and it still seems like a beginning rather than an end.
“What little risk appetite is left in Europe appears to be dwindling as we head into year-end,” credit analyst Gavan Nolan writes in Tuesday’s Markit Intraday Alert.
“The sovereign debt contagion has spread beyond the euro zone’s periphery and into the club’s core,” he notes.
France and Belgium, both founder members of what is now the EU, saw their CDS levels reach unprecedented levels today as investors shied away from risk.
It might seem strange to talk of a AAA sovereign such as France as “risky”. But the French government was forced to quash rumours that the country could lose its stellar rating.
French budget minister Francois Baroin says that there is “no risk” and “no concern” about its rating. Finance minister Christine Lagarde says that France is among the “best risks in Europe”.
Now, I’m getting really tired of hearing all these “the-worst-is-over”-statements. Everyone knows it isn’t true.
I have presented this figure before, and I'll do it again
The French spreads are wider than all of the Markit iTraxx SovX Western Europe index constituents bar – the PIIGS.
Today was the first time French CDS has closed above 100 points.
Belgium also broke through a key barrier. The country’s spreads widened beyond 200 bp’s to a level usually associated with the peripherals.
“Indeed, some traders are placing it in the same group as Greece, Ireland, etc, or calling it “semi-core”. Its high debt levels and political instability have been a concern to some investors for some time,” Gavan Nolan writes.
Italy, another country that would regard itself as at the core of the EU (it was also a founder member), shares Belgium’s weaknesses.
Its spreads have widened sharply this week as the markets reassessed its credit standing.
The Markit SovX WE reached 209 bp’s, a new record, before settling back later in the afternoon. This is the first time the index has gone beyond 200.
“The panic was not restricted to sovereigns. The corporate market was also infected by the concerns around government creditworthiness,” Nolan points out.
The Markit iTraxx Europe hit 120 bp’s for the first time since early July, driven by names based in the peripheral countries and France.
“Defensive names such EDF and GDF Suez widened due to their close relationship to the sovereign credit,” Nolan adds.
However, there was some improvement later in the day as the panic subsided.
“Spain’s auction on Thursday and the ECB announcement the same day will play a major role in shaping sentiment,” Gavan Nolan at Markit Credit Reasearch concludes.
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Tagged as Basis point, Belgium, Christine Lagarde, Credit default swap, European Union, Financial Engeneering, Financial Markets, France, GDF Suez, Government debt, International Econnomic Politics, ITraxx, Law & Regulations, PIGS (economics), Quantitative Finance, Spain, Views, commentaries and opinions