Country risk

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The country risk ( English country risk ) referred to in Foreign Trade the specific loss risks to which a creditor or entrepreneur is exposed, for example, from the export / import , investment or financial products of banks which the enforcement of claims to foreign parties or to the use of capital and threaten expected profits . Crisis situations can force a country to cancel all or part of the agreed interest and repayment payments by the state itself or by debtors resident there . This includes failure to meet obligations from securities of any kind or derivatives .

General

As debtors, other states are subject to a default risk , which is referred to as country risk at the state level. In contrast to the credit risk vis-à-vis companies or consumers , when it comes to the state as a debtor, economic indicators play no role, rather economic indicators , social and political aspects. Investors , creditors in international credit transactions or exporters / importers must take the country risk of another country into account when making their decisions . While creditors from government bonds or loans have to assess the probability of default and the amount of default credit , investments by investors are subject to the risk of a ban on profit transfers or, in the worst case, the risk of expropriation . All of these events form part of country risk.

As with any default and credit risk, the individual criteria that a creditor subjectively identifies as risk factors also vary with country risk. Both the selection of the criteria and their weighting can vary depending on the creditor.

Concept of country risk

A distinction must be made here between the original country risk in which the respective country is the direct debtor and the derivative country risk in which a borrower within a country is the debtor. This distinction is important because the original country risk correlates negatively with the individual borrower risks in the same country. Based on a global definition of the term, such as B. used by the Bank for International Settlements (BIS), an operable term can then be derived by decreasing abstraction. For the BIS, country risk “refers to the possibility that sovereign borrowers of a particular country are unable or willing, and that other borrowers are unable, for reasons other than the usual risks associated with each Granting credit to meet their overseas obligations ”. For Deutsche Bank , country risk is "the risk of a loss in any country due to political and social unrest, nationalization and expropriation, government failure to recognize foreign debt, exchange controls or a devaluation of the local currency". All definitions have in common that the country risk is only intended to cover those risks that are not related to the credit risk of a foreign debtor, but rather arise generally from the economic and / or political situation of the country in which the debtor is domiciled .

Original country risk

Economic, political and transfer stop components of country risk can be derived from this definition. There is also broad agreement among creditors that initially only the foreign currency liabilities of a state, but not debts in domestic currency, should be taken into account. This is based on the idea that a state can produce its own currency autonomously by creating money quantities (quasi ad infinitum ), while foreign currency reserves are only available to a limited extent. However, a state cannot print its own currency indefinitely, as this leads to undesirable inflation in the short term .

Then the country risk is the danger that a state cannot service its own foreign currency liabilities because the government or the central bank

(a) not able ( economic risk ) or unwilling ( political risk is) used for repayment of foreign currency liabilities necessary foreign exchange to procure or not the state existing foreign exchange to repay uses ( stop transfer risk ) or
(b) the economic and / or political situation of the state has deteriorated so seriously that it

Derivative country risk

If the state is not the direct debtor itself, but a borrower from this state, the definition even has to be expanded to a two-dimensional variant. Past experience has shown that debtors with impeccable creditworthiness in a country with poor creditworthiness were prevented from repaying their debts by the state, government agencies or central bank (negative correlation ). From all of this, the following definition of the term country risk can be derived.

Country risk is the risk that a debtor will not be able to service his foreign currency liabilities because

(a) the government or central bank of his country is unable (economic risk) or willing (political risk) to provide the foreign currency required to repay foreign currency liabilities or the debtor is not allowed to use available foreign currency for repayment (transfer stop risk) or
(b) the economic and / or political situation of his country has deteriorated so seriously that he
  • and / or does not receive any foreign currency loans on the international credit markets despite sufficient creditworthiness
  • that there has been a drastic drop in the rate of the domestic currency, which prevents a significant part of the debtors of this state from procuring the necessary domestic currency, which would have to be used for the corresponding purchase of the foreign currency.

In a further step, the liabilities in local currency must now also be included, because these too can be subject to a political risk and / or a transfer stop risk.

Country risk analysis and country rating

General

Like other economic entities ( companies , consumers ), states can also be rated as debtors by rating agencies , export credit insurance companies , credit institutions or specialized NGO organizations . Thereto are lenders , investors and media interested because they can not make even the most complex rating processes or want. Those interested financially engaged in states base their decisions on these ratings. Bad country ratings force credit institutions, insurance companies or other investors and creditors to sell financial products linked to the national risk or to cancel loans. Conversely, financial products from badly rated countries may not be purchased.

Country risk analysis is the analysis of the risk of a financial investment in a particular state, a country rating ( English sovereign rating ends). This is an early detection system that examines opportunities and risks in a certain foreign market that exist due to the political situation of this country and its social, economic and legal environment as well as foreseeable or expected future developments.

target

The analysis of the country risk aims to make the probability of default of a foreign investment, a loan to foreign borrowers or an export financing transparent. The probability of default is based on the repayment risk, which is related to the solvency and also the willingness to pay of a specific country. The analysis is technically organized like an analysis of the creditworthiness of a borrower, but also has to take into account other criteria that are typical for the assessment of creditworthiness risks at the state level. These ultimately lead to a country rating, which aims to classify countries in a ranking of their relative creditworthiness with the possibility of ordinal comparability.

Before analyzing the country risk, risk-relevant, country-specific criteria must be worked out, which are typical and important for the assessment of a country risk.

Analysis of country risk

Since country risks cannot be objectively determined and are not directly observable, stable relationships between observable risk-causing and representative variables must be sought. A distinction must be made between qualitative (political situation) and quantitative risk factors (economic indicators ). The country risk analysis first requires a retrospective consideration that tries to uncover the causes of risk and reveals cause-effect relationships. The factors to be forecast are then derived and indicators for a forecast are determined in order to arrive at a cause-related and future-oriented risk assessment in the next step.

Against the background of these requirements, certain political information and basic economic data of each country are summarized into meaningful and representative key figures, which are then compared with a comparative value. In addition to the rating agencies, international banks and especially three NGO companies combine these key figures into a rating or index.

  • Two global indices have become established here, the BERI (Business Environment Risk Index) and the Peren-Clement-Index . The Peren-Clement-Index has established itself in business practice because, in contrast to the Beri-Index, it explicitly takes into account decision-significant knock-out variables.
  • "Institutional Investor" has published a country ranking since 1979, which summarizes the countries according to continents.

All countries can be compared with one another in their order, but also the key figures for the country in their historical development.

Country Assessment Criteria

The examination of the foreign market examined includes characteristics that can be divided into three groups with regard to entrepreneurial activity there.

Degree of freedom

Basic requirements

Economic framework conditions including development trends

Country risk and corporate risk

Country ratings not only affect the creditworthiness of the respective country, but also influence the creditworthiness of all companies located there, in whose company rating they are included. According to this dogma of the rating agencies, a company can not better rating than the country in which it takes its seat has ( English country ceiling ). Country risk and corporate risk are positively correlated with one another . If a company with a high credit rating is based in a country with a poor credit rating, the “country ceiling” automatically leads to the company rating being downgraded to the corresponding country rating. The background to this is the fact that the company can, due to its good credit rating, bear the debt service , but the state is unable or unwilling to approve the transfer of the debt service to the foreign lender due to its poor situation . The consequence for the creditor is that the debt is not serviced despite the company's good credit rating.

meaning

Due to the increasing economic and organizational interdependence of countries around the world, the assessment and evaluation of country risks has become increasingly important. In particular, the financial crisis that began in 2007 with its effects on country risks that have become more volatile (in PIIGS countries and various emerging countries ) shows the need for a well-founded country risk analysis. This provides a guide to the question of the type and scope of corporate engagements in foreign markets.

Country risk premium and credit spread

The country risk premium is the interest rate premium on loans or bonds that arises on the market due to the additional country-specific risks of the country of the debtor. From the perspective of the creditor, it is a risk premium . The level of the country risk premium depends on the stability and creditworthiness of the respective country. This is determined using ratings published by rating organizations. Among the most important are those of the US organizations Fitch Ratings , Moody’s and Standard & Poor’s .

The country rating on which the premium is based indicates the probability that an investor will suffer a loss if he invests in a particular country. Both the public and the private sector are taken into account. In order to obtain the index, various risk factors are collected, which are based on the general economic situation, political stability and the social and international situation. The country rating is a rating that condenses the criteria for country assessment into a rating code . The better the rating code, the lower the country risk of a country and vice versa. The country risk is usually identical to the rating for government bonds in this country. The premium is shown in points, with 100 points representing an interest surcharge of 1%. Historically, values ​​of over 1,500 points have rarely been achieved; Argentina set the previous record in the country risk index EMBI + (an index specifically for emerging countries) with over 7,000 basis points (see also the Argentina crisis ).

The credit spreads actually paid on the market open up another method of measuring the country risk of states. The benchmark is often the return on a so-called “risk-free” government bond (a country with the highest credit rating is selected for this), which is compared with the return on the government bond of the country to be analyzed. The yield difference between the two bonds reflects the country risk assessed by the bond market. A similar comparison results from comparing the rates of credit default swaps in different countries.

literature

  • Christian Braun: Procedure for country risk assessment - an empirically based comparative assessment . Hamburg 2006, ISBN 978-3-8300-2585-6
  • Peter Lang: Country risk analysis in the context of modern credit risk models at banks - A study with a special focus on market price information from emerging markets . Frankfurt 2003, ISBN 978-3-631-50344-7
  • Rolf-Dieter Reineke, Friedrich Bock (Hrsg.): Gabler Lexikon Unternehmensberatung . Wiesbaden 2007, pp. 248-249.

Web links

Individual evidence

  1. Basel Committee on Banking Supervision, "Controlling the International Lending Business of Banks: Analysis of Country Risk and Measurement and Control of Country Exposure", March 1982, p. 1 (PDF; 127 kB)
  2. Annual Report Deutsche Bank AG 2007
  3. Helmut Krämer-Eis, Evaluation of sovereign country risks , Jena 1997, p. 27
  4. Institutional Investor Global Credit Ranking ( Memento of the original dated February 22, 2009 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. @1@ 2Template: Webachiv / IABot / www.iimagazinerankings.com
  5. Gabler Wirtschaftslexikon, 15th edition, 2001, p. 1934, ISBN 3-409-30388-X
  6. Werner Schwanfelder: Internationale Anlagenangebote , 1989, p. 80 ff. ( Preview in the Google book search)
  7. Moritz Schularick: Financial Globalization in Historical Perspective , 2006, p. 108 ( preview in the Google book search)
  8. Derik-W. Evertz: The country risk analysis of the banks , 1992, p. 25 ( preview in the Google book search)
  9. Christiane Lemke: International Relations: Basic Concepts, Theories and Problem Areas , 2000, p. 12 f., ISBN 3-486-23858-2 ( preview in the Google book search)