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Z-Score Creator: Euro Crisis Was Foreseeable…with Due Diligence on Homework

As noted in this week’s eNews, among many media outlets, the European Union debt and financial crisis is teetering on spinning out of control. The Spanish banking struggles are the latest piece appearing close to a fall, and represents much more that the proverbial pawn, in comparison, that was the well-publicized Greek problems.

New York University Professor and 2012 Credit Congress speaker Ed Altman, PhD, told NACM this week that the entire mess could have limited, from a perspective of U.S. businesses, if credit departments had a few years ago not relied so heavily upon data from ratings agencies (Standard & Poor’s, Moody’s, Fitch) and it own interactions with a limited number customers in said countries.

“For a year and a half, I’ve been arguing the typical and traditional way to analyze the health of sovereign debt is incomplete, at best,” said Altman, the Max L. Heine Professor of Finance at the NYU Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions. “It should be supplemented by a more in-depth analysis of the health of the private sector in each of the countries that are being analyzed.”

Altman, who developed the Z-Score bankruptcy predictor in 1968 and recently launched a Z-Score-Plus Smart Phone app, said running a check of public companies in the struggling European nations five years ago would have foretold some of the coming problems even as the sovereign ratings were good. Back then, Altman used the Z-score to determine that 13% of Greek companies were at least 50% likely to default. That number has spiked to upward of 25% in 2012. And fast-rising trend was also noticeable, but to a lesser extent in the rest of the “PIIGS nations:” Portugal and Italy both show that 25% of its public companies are at least 20% likely to default at present, not including financial institutions. Spain’s is much lower but, again, if factoring in financial institutions as well, no one save Greece is in worse shape than the Spanish, Altman suggested. All that gives credence to his outlook on the ratings agencies:

“Spain and Italy are still ‘A3’ from Moody’s and similar from S&P, but we all know these countries are no longer A-rating-worthy.  I’m not saying you should ignore the macro factors most people look at, but you need to look at the micro factors closely as well.”

-Brian Shappell,CBA, NACM staff writer