FINS3630 Lecture Notes - Lecture 2: Financial Ratio, Economist Intelligence Unit, Debt Service Ratio
Lecture 9: Sovereign Risk
- Risk that gov refuses to pay back loans in full, esp in crisis- implies that gov hinders
repaym of loans in private sector
o Det repudiatio: outright aellatio of orroer’s urret + fut foreig D/E
oblig
o Det reshedulig: il ∆s i otratual ters aturity/IR of det
- Outside-country sovereign risk eval methods:
o Euromoney country risk index (tier 1-5)
▪ Based on eco, struc, political charac: 0 max default risk – 100 no
default risk
o Economist intelligence unit
▪ Rate countries by combined value of eco/political default risk: 0 low
sovereign risk – 100 worst sovereign risk
o Institutional investor index rating
▪ Weighted scores by exposure of each bank to country (0=default,
100=no probability of default)
- Internal eval models
o Selecting macro/micro variables related to country risk
o Discriminant analysis calc z-score of pr of country rescheduling
o Debt service ratio (interest+amort on debt /exports: i.e. positive relo size of
debt/pr of rescheduling) → high systematic element
o import ratio (total imports/total forex reserves: greater need for imports=
quicker depletion of forex reserves: i.e. ratio, pr reschedule positive related)
→ low systematic element
o investment ratio (real investm/GNP: deg to which country is allocating
resoures to real iest i fatories/ahies…: i.e. higher ratio = ore
productive eco in fut (lower pr to reschedule –ve relo VS. higher ratio =
country build up investm infrastructure i.e. reduces extent to which country
relies on external financing in fut and less concerned about fut threats of
credit rationing by FI +ve relo
o variance of export revenue VAREX = sd(ER)^2 → high systematic element
▪ quantity risk (production of raw commodities are subject to periodic
fluctuations/shortages) + price risk (intl $P at which country can sell
exportable commodities are subject to high volatility)
▪ more volatile export earnings, less certain pr to meet repaym
commitments from creditors
o domestic money supply growth= ∆M/M, higher do MG, higher domestic
inflation rate and weaker co becomes in dom/intl markets → real output
impacted and country rely on hard currencies for dom/intl payments → low
systematic element
find more resources at oneclass.com
find more resources at oneclass.com
