Covering Globalization: A Handbook for Reporters

By Anya Schiffrin; Amer Bisat | Go to book overview

CHAPTER TWELVE
ASSESSING
SOVEREIGN RISK

GRACIANA DEL CASTILLO


INTRODUCION

SOVEREIGN-RISK ANALYSIS has acquired a new importance as more and more emerging-market governments borrow in the international capital markets. Governments borrow for a number of reasons, most importantly to finance their fiscal and current-account deficits. In addition to borrowing from banks, governments borrow from the public by issuing bonds, bath in domestic and foreign currency. A bond (or debt instrument) is simply an IOU that describes the terms of the contract between borrower and lender, including the cost of borrowing and the promise of repayment in full by a certain time. Sovereign risk refers to the risk that the government will not servic its debt in full and on time.

While corporate rare issuers often need to pledge some asset as collateral, a government borrows Based on its capacity to raise taxes and adopt ether monetary and exchange-rate policies to cover its debt. Hence sovereign-risk analysis focuses on the ability, flexibility, and willingness that the government has to take appropriate policy measures to facilitate its debt servicing.

Investors purchase government bonds according to their appetite for risk. Those who are risk averse will be likely to purchase U.S. Treasury Bills, the returns on which are low because of their low risk. Those who are risk prone are more likely to be attracted to emerging-market bonds where the higher return is commensurate to the higher risk.

Investor funding is often pooled together and managed by a professional money or fund manager. These institutional investors, including pension arid mutual funds, are active in government bond markets and

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