Saturday, June 18, 2011
Country Risk Part.III
During the introduction of the Cooke ratio, depending on whether the country was a member of the OECD or not, the commitments to residents of foreign countries were weighted at 0% or 100%. A debt security issued by a government could therefore not return in the calculation of the Cooke ratio, which consequently gave an advantage to OECD countries until 1994 and the opening of the more "modest”.
As part of the Basel II regulations, the IRB approach (Internal Rating Based) implies the existence of a probability of default for counterparties. But is it really possible to speak of "default" for the country? The S & P introduced the notion moreover SD (Default Selected) to report that states do not honor their debts, since technically they cannot be made bankrupt and businesses. Of default of a country therefore requires analysis of the creditworthiness of the state. It is thus necessary to understand properly the impact of the fiscal capacity of the State concerned on its ability to repay and to define an acceptable level of debt for sovereign debt. However, these problems are more related to the concept of sovereign risk than that of country risk as a whole; demonstrate once again that the concepts are very similar.
Investing in emerging high growth is an important trend as evidenced by the proliferation of funds BRIC (Brazil, Russia, India and China). However, although the results are quite encouraging, these investments are not safe because these countries are not immune to political tensions, as their market is very volatile at times and finally as a big part of the investment is located in the energy. That's why the rating agencies are requested by the fund managers to reassure investors, the country risk analysis and must rest.