Business Glossary

risk that economic or political changes in a foreign country, for example, lack of currency reserves (foreign exchange). will cause delays in loan payments to creditor banks,exchange controlsby monetary authorities, or even repudiation of debt. Country risk is broader in scope thansovereign riskas it takes into account the probability of debt repayment by private borrowers as well as central governments. Banks set aside funds in a reserve account, called the Allocated Transfer Risk Reserve (ATRR)as a cushion against possible bad debt losses from foreign loans. The Asian financial crisis of 1997-which began with a currency devaluation in Thailand led to serious balance of payment problems in Asia, Russia, and Latin America-underscored this broad definition of country risk. Following the Asian crisis, international lenders came to view country risk as any event causing non-payment by private borrowers due to macroeconomic developments beyond their control.

risk that a foreign government will default on its loan or fail to honor other business commitments because of a change in national policy. A country asserting its prerogatives as an independent nation might prevent the repatriation of a company or country's funds through limits on the flow of capital, tax impediments, or the nationalization of property. Sovereign risk became a factor in the growth of international debt that followed the oil price increases of the 1970s. Several developing countries that borrowed heavily from Western banks to finance trade deficits had difficulty later keeping to repayment schedules. Banks had to reschedule loans to such countries as Mexico and Argentina to keep them from defaulting. These loans ran the further risk of renunciation by political leaders, which also would have affected loans to private companies that had been guaranteed by previous governments. Beginning in the 1970s, banks and other multinational corporations developed sophisticated analytical tools to measure sovereign risk before committing to lend, invest, or begin operations in a given foreign country. Throughout periods of worldwide economic volatility, the United States has been able to attract foreign investment because of its pe ceived lack of sovereign risk. Also called country risk or political risk.