Country risk
The risk that a country's economic, financial or political situation stops its debtors, the state and companies alike, from paying: sovereign default, foreign currency shortage, banking crisis, act of government.
March 7, 2020: Lebanon announces it will not pay the 1.2 billion dollar eurobond due on the 9th, the first default in its history. Since the fall of 2019, Lebanese banks had already been limiting withdrawals and transfers in foreign currency: a perfectly solvent Beirut importer could no longer pay its European supplier. That is country risk. It is the probability that a country's situation stops its debtors, public and private, from paying, whatever their own health. It is wider than political risk: sovereign default, foreign currency shortage and transfer blocks, banking crisis, sharp devaluation, then the business environment and the quality of the courts; expropriation and political violence are only one part of it. Country risk is rated more than it is insured. The OECD Arrangement classifies countries from 0 to 7 to set minimum premiums for officially supported export credits of two years or more; Coface and Allianz Trade publish their own grids, and credit insurers use them to set and cut their country limits. What gets insured is its effect on a contract: a buyer's non-payment through credit insurance, which also covers non-transfer, and the loss of an asset through a political risk policy. Its mark is correlation. A country crisis hits every receivable in the territory at once, and limits are cut for every insured on the same day. When the debtor is the state itself, recourse runs into its immunity and is settled by restructuring: at the Paris Club for official claims, with bondholders for bonds.
Country risk is rated, and its effects are insured piece by piece: a buyer's non-payment through credit insurance, an act of government through a political risk policy, war through public schemes of last resort. Dated case: on March 7, 2020, Lebanon announced it would not pay a 1.2 billion dollar Eurobond due on March 9, the first default in its history. Banks had already been limiting foreign currency withdrawals since the fall of 2019. An exporter whose credit insurance policy covered non-transfer was paid even though its Lebanese client stayed solvent: it was the country that had stopped paying.
- OECD, Arrangement on Officially Supported Export Credits, country risk classification (0 to 7)
- Lebanese Republic, Prime Minister's statement on suspending payment of the eurobond, March 7, 2020
country risk, sovereign risk, transfer risk, country rating
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