Default Prediction for Various National Economies through Synthetic Indicators
In the current situation, involving a global economic crisis, national economies are under a high pressure. Greek and Irish bailouts have prompted many people to wonder about the economic situation in other countries. The global crisis is causing First World countries need help from institutions such as the IMF or the ECB. The goal of this paper is to analyze the risk that these countries have to be rescued by the economic institutions. In order to prepare this ranking, we are going to use two synthetic indicators. The first one is called Distance Principal Components (DPC) and the other one Goal Programming Synthetic Indicator (GPSI). We develop this indicator taking into account variables from both the public economy and the financial markets. Concerning the public economy, we use variables such as the public debt ratio and its total amount (% of GDP), public revenues, public deficit, real GDP growth and unemployment rate. We strongly believe that the soundness of an economy in the long-term depends on the behavior of these variables. Therefore, if they show a positive trend, other variables exposed to speculation in the financial markets should present a proper behavior as well. With this we mean two variables negotiated in the markets: debt risk premium and credit default swap levels. This paper will bring easily understandable results that will let us know what the bankruptcy situation is in the rest of the countries analyzed (original abstract)
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