Measuring sovereign credit risk across the euro area economies

This project (undertaken on behalf of a major fund manager) was the first step in the creation of Fathom’s proprietary Sovereign Fragility Indicator. The aim was to create a fundamental economic measure of sovereign fragility, free of judgement and of subjective assessments of political stability — in other words to relate sovereign fragility to economic variables like government debt, inflation volatility, banking sector assets, and only to those variables.

That led us (and our client) to identify large and growing sovereign risks in the peripheral economies of the euro area a long time before that view became the consensus; and it also revealed the kind of policy action that would be necessary to mitigate those risks. Some of those actions were subsequently taken.

Our client was able to make money in fixed income markets in both directions — as the risks were recognised, and as they were subsequently mitigated.