VRM 5. Country Risk: Determinants, Measures, and Implications

Learning Objectives

1) Explain how a country’s position in the economic growth life cycle, political risk, legal risk, and economic structure affects its risk exposure.

2) Evaluate composite measures of risk that incorporate all major types of country risk.

3) Compare instances of sovereign default in both foreign currency debt and local currency debt and explain common causes of sovereign defaults.

4) Describe the consequences of sovereign default.

5) Describe factors that influence the level of sovereign default risk; explain and assess how rating agencies measure sovereign default risks.

6) Describe the characteristics of sovereign credit spreads and sovereign credit default swaps (CDS) and compare the use of sovereign spreads to credit ratings.