Measuring Country Risk

Abstract

The concept of “country risk” has once again come under the spotlight. Globalization, the shock-waves of the subprime crisis, manifested in sovereign and private debt crises, and the fear to a “contagion” of risk between market participants are, among others, the reasons that make topical this form of risk. The aim of this chapter is to offer an overview of the factors that influence country risk, and an analysis of the methods most commonly used to measure it, with a discussion of their pros and cons. The conclusion is that none of those methods have offered satisfactory results. In this regard, the authors propose a change in the way to analyze country risk. Rather than attempting to predict debt crises, it is necessary to identify the sources of risk, and accept uncertainty as a feature of the current environment.