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 controls by monetary authorities, or even repudiation of debt. Country risk is broader in scope than sovereign risk as 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.