Norbert Gaillard

  • Country Risk

    Norbert Gaillard

    Country risk has been a key notion for economists, financiers, and investors. Norbert Gaillard defines this notion as "any macroeconomic, microeconomic, financial, social, political, institutional, judiciary, climatic, technological, or sanitary risk that affects (or could affect) an investor in a foreign country. Damages may materialize in several ways: financial losses; threat to the safety of the investing company's employees, clients, or consumers; reputational damage; or loss of a market or supply source."
    Chapter 1 introduces the key concepts. Chapter 2 investigates how country risk has evolved and manifested since the advent of the Pax Britannica in 1816. It describes the international political and economic environment and identifies the main obstacles to foreign investment. Chapter 3 documents the numerous forms that country risk may take and provides illustrations of them. Seven broad components of country risk are scrutinized in turn: international political risks; domestic political and institutional risks; jurisdiction risks; macroeconomic risks; microeconomic risks; sanitary, health, industrial, and environmental risks; and natural and climate risks. Chapter 4 focuses on sovereign risk. It presents the rating methodologies used by four raters; next, it measures and compares their performance (i.e., their ability to forecast sovereign defaults). Chapter 5 studies the risks likely to affect exporters, importers, foreign creditors of corporate entities, foreign shareholders, and foreign direct investors. It presents the rating methodologies used by seven raters and measures their track records in terms of anticipating eight types of shocks that reflect the main components of country risk analyzed in Chapter 3.
    This book will be most relevant to graduate students in economics as well as professional economists and international investors.

  • The public debt crisis that Eurozone countries have experienced since 2010 has been accompanied by a resurgence of sovereign risk. Greece was obliged to restructure its debt in 2012. The credit position of even the wealthy countries is shakier than at any time since the Great Depression. Now more than ever it is essential to understand sovereign risk because the default of a country, or even its lack of credibility, is bound to jeopardize political stability and weaken the credit standing of all other economic actors. This book reviews and analyzes the different means used to forestall and protect against sovereign defaults. In light of the Eurozone's 2010-2012 sovereign debt crisis, this book also emphasizes the roots of sovereign creditworthiness. Chapter 1 establishes a typology of sovereign defaults. A sovereign "bankruptcy" may take many forms (debt repudiation, moratorium, restructuring, etc.). Chapter 2 presents the different contractual and legal tools used to protect against sovereign defaults. Chapter 3 investigates how some investors have been able to interfere with the debtor's economic policy by insisting that measures be taken to reduce the risk of default in the short and medium term. Such interference can be direct or may be more subtle. There is a specific focus on the conditionality imposed by the International Monetary Fund. Chapter 4 studies the various tools that investors can use to discriminate among borrowers and forecast debt crises (bond yields and spreads as well as ratings provided by Fitch, Moody's, Standard & Poor's, and Euromoney Country Risk). Chapter 4 also demonstrates that sovereign debtors must overcome seven types of risk in order to preserve their creditworthiness: natural disaster, geopolitical risk, institutional and political risk, economic risk, monetary and exchange rate risk, fiscal and tax-system risk, and debt-related risk.

  • The financial difficulties experienced by Greece since 2009 serve as a reminder that countries (i.e., sovereigns) may default on their debt. Many observers considered the financial turmoil was behind us because major advanced countries had adopted stimulus packages to prevent banks from going bankrupt. However, there are rising doubts about the creditworthiness of several advanced countries that participated in the bailouts. In this uncertain context, it is particularly crucial to be knowledgeable about sovereign ratings. This book provides the necessary broad overview, which will be of interest to both economists and investors alike.Chapter 1 presents the main issues that are addressed in this book. Chapters 2, 3, and 4 provide the key notions to understand sovereign ratings. Chapter 2 presents an overview of sovereign rating activity since the first such ratings were assigned in 1918. Chapter 3 analyzes the meaning of sovereign ratings and the significance of rating scales; it also describes the refinement of credit rating policies and tools. Chapter 4 focuses on the sovereign rating process. Chapters 5 and 6 open the black box of sovereign ratings. Chapter 5 compares sovereign rating methodologies in the interwar years with those in the modern era. After examining how rating agencies have amended their methodologies since the 1990s, Chapter 6 scrutinizes rating disagreements between credit rating agencies (CRAs). Chapters 7 and 8 measure the performances of sovereign ratings by computing default rates and accuracy ratios: Chapter 7 looks at the interwar years and Chapter 8 at the modern era. The two chapters assess which CRA assigns the most accurate ratings during the respective periods. Chapters 9 and 10 compare the perception of sovereign risk by the CRAs and market participants. Chapter 9 focuses on the relation between JP Morgan Emerging Markets Bond Index Global spreads and emerging countries' sovereign ratings for the period 1993-2007. Chapter 10 compares the eurozone members' sovereign ratings with Credit Default Swap-Implied Ratings (CDS-IRs) during the Greek debt crisis of November 2009-May 2010.

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    "This publication could not be more timely. Little more than a decade after the global financial crisis of 2008, governments are once again loosening the reins over financial markets. The authors of this volume explain why that is a mistake and could invite yet another major crisis."
    -Benjamin Cohen, University of California, Santa Barbara, USA"Leading political scientists from several generations here offer historical depth, as well as sensible suggestions about what reforms are needed now."
    -John Kirton, University of Toronto, Canada, and Co-founder of the G7 Research Group"A valuable antidote to complacency for policy-makers, scholars and students."
    -Timothy J. Sinclair, University of Warwick, UK
    This book examines the long-term, previously underappreciated breakdowns in financial regulation that fed into the 2008 global financial crash. While most related literature focuses on short-term factors such as the housing bubble, low interest rates, the breakdown of credit rating services and the emergence of new financial instruments, the authors of this volume contend that the larger trends in finance which continue today are most relevant to understanding the crash. Their analysis focuses on regulatory capture, moral hazard and the reflexive challenges of regulatory intervention in order to demonstrate that financial regulation suffers from long-standing, unaddressed and fundamental weaknesses.