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As international bankers increased lending to less creditworthy countries, they learned (the hard way) that more attention has to be paid to the possibility of loss. The potential for loss arises not only from microfactors like credit risk of the borrower but also from exogenous factors like political, social, and economic environments, which are beyond the control of any individual borrower-hence the concept of country risk and the associated practice of country risk assessment.
Therefore, a more appropriate term would be country risk management, a practice of which country risk assessment is but one element.
Country risk, for the international banker, is the potential for a loss of the assets a bank has loaned across borders in a foreign currency. A loss could be caused by a multitude of factors that renders a borrower unable to service or repay the loan as per the agreement. (Also at risk may be physical assets such as branch offices of multinational banks, but that issue is not discussed here.) The borrower may be a sovereign nation, a local firm, or a multinational corporation of another country. Whatever the case, the loan is papered according to the country of risk, that is, the country from which the repayments will flow (Angelini, Maresca, Russo, 2004:855).
Country risk assessment entails the identification; a qualitative and quantitative analysis and measurement of the political, economic, social, and natural conditions in the country in which the borrower operates; and the degree to which these exogenous factors can impinge on the borrower's capac ...
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