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Country Risk (Salient Points)

  • Country Risk is the possibility that a foreign country‘s borrower may be unable or unwilling to fulfill its contractual obligations towards a foreign lender and/or investor
  • For lenders, country risk may lead to delay or stoppage of contracted loan payments
  • It can be used by MNCs as a screening device to avoid countries with excessive risk
  • It can be used to monitor countries where the MNC is presently engaged in international business
  • Assess particular forms of risk for a proposed project considered for a foreign country

History of Country Risk

  • Perigrenee’s bond investment in Russia and consumer business in Indonesia
  • Crisis in China in 1989
  • In the 1980s the crises in Iran, Afghanistan and some Latin American
  • These countries made MNCs realize the importance of effective country risk analysis

Significance of Country Risk Ratings

  • Globalization: Expansion and diversification of investment possibilities
  • Sovereign credit ratings are a condensed assessment of a government’s ability and willingness to repay its public debt both in principal and in interests on time” 
  • “Pivot of all other country’s ratings” (Ferri et al. 1999), i.e.,
  • Ceiling or upper bound on the other ratings
  • Ratings influence the interest rates at which countries can obtain credit on the international financial markets
  • Ratings also influence credit ratings of national banks and companies, and affect their attractiveness to foreign investors
  • Institutional investors are sometimes contractually restricted on the degree of risk they can assume, i.e., they cannot invest in debt rated below a prescribed level

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