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Euler Hermes > Economic research > Our methodologies

Our methodologies

  • Country risk
  • Cross-country insolvency analysis
The evaluation of the overall level of country risk is based on a central element, the country grade, a measure of transfer and convertibility risk and of the quality of the business climate, which is determined by a combination of three analyses:

(I) The Macroeconomic Rating (ME)

based notably on analysis of: the structure of the economy, budgetary and monetary policy indebtedness, the external balance, along with the stability of the banking system and other factors.

(II) The Structural Business Environment Rating (SBE) 

based on perceptions of the regulatory and legal framework, control of corruption and relative ease of doing business.

(III) The Political Risk Rating (P)

based notably on analysis of: the mechanisms for transferring of power and the processes for succession, the concentration of power, the effectiveness of policy, the independence of institutions, social cohesion, international relations, etc.
The first two elements (the ME Rating and the SBE Rating) are the two components used to calculated the Economic Risk Rating (E) assigned to each country. This latter is, in turn, combined with the Political Risk Rating (P) to make our Country Grade, on a six-level scale running from AA to D, in which AA is the highest level of country grade and D is the lowest.

This country grade is then combined, for the 70 biggest economies, with the short term alerts indicator, this latter being a combined measure of a country’s vulnerability in the short term to financing risk (Financial Flows Indicator, or FFI) and cyclical risk (Cyclical Risk Indicator, or CRI). 

The four levels of the overall country risk are the result of grouping into four classes of the different possible combinations of the country grade and, as the case may be, of the short term alerts Indicator, on a scale of low, medium, sensitive and high.
​The concept of business insolvency varies from one country to another, making it hard to give international comparisons. The disparities between countries are for two main reasons.

First, official insolvency procedures are not of equal importance everywhere:

In some countries, amicable arrangements predominate (for example, in Spain and Italy), and the figures for company insolvencies are quite low, thus understating the real picture for business insolvencies.

Second, in some cases, individual entrepreneurs are included in the figures for business insolvencies.

In other cases, however, they are included in the figures for personal bankruptcies (for example, in the US), with no distinguishing between purely personal bankruptcies and sole trader bankruptcies. In the latter cases, the number of business insolvencies is significantly understated. 

Besides this, for each country we use the definition of a business that is used in its insolvency demographics for calculating an insolvency rate. Thus, the number of businesses used for the US represents solely companies, and does not take account of individual entrepreneurs, estimated to total around 17million.

However, for most countries the number of businesses and the number of insolvencies include the figures for individual entrepreneurs. 

To overcome the heterogeneous nature of national statistics and circumstances,
we employ the change in insolvencies over time rather than their absolute
numbers. For each country, we have calculated an insolvency index, using a basis of 2000=100.

We have then constructed our Global Insolvency Index (GII), which is the weighted sum of the national indices. Each country is weighted according to its share of the total GDP (at current exchange rates) of the countries included in our study.