risk of default by a foreign central government or agency backed by the full faith and credit of the government. A famous banker once said, "Sovereign nations don't go broke." But they can refuse to pay their obligations to creditor banks, making it extremely difficult for a bank to collect full repayment of its loans. A sovereign borrower cannot be sued without its permission.
risk that a foreign government will default on its loan or fail to honor other business commitments because of a change in national policy. Throughout periods of worldwide economic volatility, the United States has been able to attract foreign investment because of its perceived lack of sovereign risk; also called country risk or political risk.
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.
