Which countries might be in trouble (risk of default of debts) as a result of the credit crisis?  How do you measure this?  What are the indicators?

There are a number of ways to measure the risk that a country might be in trouble…

1. foreign currency debt rating :  Fitch ratings “investment grade?”…Companies such as Fitch, Moodys, and S&P all keep track of foreign countries sovereign debt, and rate the likelihood of default.
2. Sovereign Credit Default Swaps :  insurance premiums purchased to insure against sovereign defaults.  By watching the premiums move up and down, you get a good indication of the market perception of the likelihood of default.  Higher cost for insurance = more chance of default.
3. EMBI+ index:  The Emerging Markets Bond Index… tracks returns for actively traded external debt instruments (Sovereign Bonds) in emerging market, and is also J.P. Morgan’s most liquid U.S-dollar emerging markets debt benchmark
4. The difference (spread) between emerging markets debts (Eurobonds issued outside the country) and US Treasuries.  See local bond markets and compare vs. US treasuries.
5. Foreign reserves, if they are being spent by the country in order to adjust for a Reserve Balance of payments deficit is clearly not a good sign.  If it is happening that a country is paying out reserves to defend a currency, or make up for a loss of capital account, this might be a good indicator that the country is in trouble.
6. Is the currency crashing in value?  If so, then its a great indicator that foreign exchange professionals are betting that the country might be in trouble, and so are betting against the currency (and locals are trying to get their money out).

Further Reading:

• foreign currency debt rating
• political risk assessment