Country Risk Assessment: A Guide to Global Investment Strategy (The Wiley Finance Series)

One of the few books on the subject, Country Risk Assessment combines the theoretical and practical tools for managing international country risk exposure. - Offers a comprehensive discussion of the specific mechanisms that apply to country risk assessment. - Discusses various techniques associated with global investment strategy. -Presents and analyses the various sources of country risk. - Provides an in depth coverage of information sources and country risk service providers. - Gives techniques for forecasting country financial crises. - Includes practical examples and case studies. - Provides a comprehensive review of all existing methods including the techniques on the cutting-edge Market Based Approaches such as KMV, CreditMetrics, CountryMetrics and CreditRisk+. Country Risk Assessment......Page 4 Contents......Page 8 Preface......Page 12 Acknowledgments......Page 14 Foreword by Campbell R. Harvey......Page 16 1.1 An historical perspective......Page 18 1.2 Outline of the book......Page 21 References......Page 24 2.1.1 The terminologies......Page 26 2.1.2 Definitions of country risk......Page 27 2.1.4 Types of investment......Page 30 2.1.5 The historical context......Page 31 2.1.6 Different methodologies......Page 32 2.2.1 Natural disasters......Page 33 2.2.2 Socio-political risk......Page 34 2.2.3 Country-specific economic risk......Page 39 References......Page 42 3 The Economic and Financial Foundations of Country Risk Assessment......Page 48 3.1.1 Relative price effects: The elasticities approach......Page 49 3.1.2 Income effects: The absorption approach......Page 50 3.1.3 Stock adjustments: The monetary approach......Page 55 3.1.4 Stock adjustments: The portfolio balance approach......Page 58 3.1.5 Country risk: Ratio analysis......Page 59 References......Page 64 4.1 Introduction......Page 66 4.2 Analysis of welfare and social indicators of the development process......Page 68 4.3 Analysis of the macroeconomic structures of growth......Page 69 4.4 External indebtedness, liquidity and solvency analysis......Page 74 4.5 The savings–investment gap and domestic financial intermediation......Page 78 4.6 Growth, crisis and governance......Page 80 4.7 The “qualitative” aggregate approach to political risk......Page 86 4.8 Conclusion......Page 89 References......Page 92 5.1.1 Specialized ranking firms......Page 96 5.1.2 Export credit agencies......Page 105 5.1.3 Summary of global country risk ranking methods......Page 107 5.2 Country credit ratings......Page 110 5.2.2 Fitch......Page 111 5.2.3 Moody’s......Page 115 5.2.4 Standard & Poor’s......Page 118 5.2.5 Country rankings published in magazines......Page 119 5.2.6 Summary of country credit rating methods......Page 122 5.3 Conclusion......Page 126 References......Page 127 6.1 Discriminant analysis......Page 132 6.2 Logit and probit models......Page 134 6.3 Regression analysis and model building......Page 135 6.4 Monte Carlo simulations......Page 138 6.5 Value at risk (VaR)......Page 139 6.5.2 VaR for a two-asset portfolio......Page 140 6.6 Principal components analysis......Page 141 6.7 Non-linearities and non-parametric estimation......Page 142 6.9 Multicriteria......Page 144 References......Page 146 7.1.2 Probabilities of default using interest rate spreads......Page 150 7.1.3 Probabilities of default using firm value......Page 152 7.1.4 Countrymetrics......Page 154 7.1.6 Credit value at risk......Page 157 7.1.7 Credit VaR, default correlation and contagion......Page 158 7.2.2 Adjusting the discount rate......Page 159 7.2.3 The Macro CAPM......Page 161 7.2.4 Measuring political risk as an insurance premium......Page 162 References......Page 164 8.1 Modern financial theory......Page 166 8.2.1 The international portfolio investment panorama......Page 171 8.2.2 Impact of country risk on international portfolio investment......Page 172 8.2.3 International diversification......Page 173 8.2.4 International Capital Asset Pricing Model......Page 175 8.3 The Limits of the ICAPM......Page 176 8.3.1 The normal distribution......Page 177 8.3.2 Portfolio diversification......Page 178 8.3.4 The Bank of America approach......Page 180 8.3.5 The Goldman Sachs approach......Page 181 8.4 Conclusion......Page 182 References......Page 183 9.1 Introduction......Page 188 9.2.2 Bonds versus loans......Page 191 9.2.3 The rising importance of commercial bank lending in the post-WWII era......Page 192 9.2.4 The debt crisis and the market-driven menu approach......Page 193 9.3.1 Phase I – Buying time with rescheduling......Page 194 9.3.2 Phase II – The new money approach......Page 195 9.3.3 Phase III – The official concerted approach to debt restructuring......Page 196 9.4 Debt reduction instruments......Page 202 9.5.1 The return of private capital flows......Page 205 9.5.2 The return of bondholders......Page 206 9.5.4 The emergence of structured financing......Page 207 9.6 Conclusion......Page 208 Appendix: The Brady Plan at work in EMCs......Page 209 References......Page 212 10.1 Introduction......Page 214 10.2 The role of national export credit agencies......Page 215 10.3.1 The World Bank’s co-financing program......Page 218 10.3.2 The role of the International Finance Corporation......Page 220 10.4 The risk mitigation role of public and private risk guarantee institutions......Page 221 10.5 The role of private providers of specialist insurance for country risk......Page 222 10.6 The market-based “menu” approach......Page 223 10.6.1 The rise of the London Club debt secondary market of emerging market loans......Page 225 10.6.3 Technical supply and demand factors affecting debt prices......Page 228 10.6.4 Debt conversion transactions......Page 229 10.6.5 Mechanics of debt conversion......Page 230 10.6.6 Range of debt conversion transactions......Page 232 10.6.7 Official bilateral debt conversion......Page 234 10.6.8 Debt conversion: A positive sum game?......Page 235 References......Page 237 11.1 Introduction......Page 238 11.2.1 Official sources of country risk data and information......Page 240 11.2.2 Private sources of country risk data and information......Page 251 11.3.1 The role of specialized country risk assessment companies......Page 256 11.3.2 National public and private information sources......Page 257 11.3.3 Think-tanks and risk analysis companies......Page 258 11.4 Conclusion......Page 260 Appendix: External debt, official information sources......Page 261 References......Page 262 Glossary......Page 264 Index......Page 282 Country risk is a broad concept which brings together the varied disciplines of economics, finance, geopolitics, sociology and history. Based on a collective 50 years of experience as scholars, managers and advisors in the field of country risk, the authors set out to provide a solid understanding of the concepts and methodologies involved in formulating successful strategies for international risk assessment and management. With a balance between theory and practice, the book assesses the opportunities arising from the growing integration of international finance markets and presents and analyses the various sources of country risk.

It provides an in-depth coverage of information sources and country risk service providers, and explains techniques for assessing and forecasting country financial crises. It includes a comprehensive review of all existing methods including the techniques of the cutting-edge market-based approaches such as:

The book concludes with a management tool kit based on practical examples, all of which will be of interest to managers and analysts in investment banks and in corporate institutions involved in international investment, as well as to students of international finance and business.

 

Following the numerous successes it had met with during the flotation of shares and bonds in the capital markets, Baring Brothers was eager to underwrite a loan to be issued by the Buenos Aires Water Supply and Drainage Company.