Country and Sovereign Risk: Analysis, Rating and Risk Management

Duration:
2 days
Location:
Prague, NH Hotel Prague
  • Financial Crises, Commodity Prices, Country Risk and Sovereign Default Risk
  • Economic and Financial Foundations of Country Risk Assessment
  • Country Risk Assessment Methodologies
  • Country and Sovereign Ratings and their Interpretations
  • Risk Models for Sovereign Credit Risk
  • International Portfolio Investment Analysis
  • Hedging Country and Sovereign Risk
The Global Financial Crisis that started in 2008 transformed into sovereign debt crises in many countries. The debt overhang problem remains deep in advanced countries. A further and rapidly increasing concern to international lenders and investors is the potentially adverse effect of volatile commodity markets and political upheavals on the economic health of commodity producing and less developed countries. These developments have lead to a increased need for effective methods and tools for measuring and managing country risk and sovereign credit risk.

The purpose of this seminar is to give you a good a good and practical understanding of methods and tools for effectively measuring and managing country risk and sovereign credit risk.

We start with a general introduction to country and sovereign risk. We define the concepts "country risk" and "sovereign risk", and we explain the sources of these risk. We also give an overview of the role that country and sovereign risks have played in the current and historical financial crises (such as the Asian currency Crisis).

We then look at the economic and financial foundations of country risk assessment. We explain the debt dynamics and "events" such as debt restructuring, debt moratorium, and currency devaluation.

Further, we present and explain a number of country risk assessment methodologies, including the analysis of socioeconomic, fiscal and monetary variables. We also discuss how country and sovereign risks are reflected in country and sovereign credit risk ratings. We give examples of country and sovereign debt ratings and we discuss their impact on sovereign debt markets. We present some quantitative risk models for quantifying country and sovereign risk and explain how these models can be used in practice for calculating "Country VaR" and other risk measures.

Further, we look at the investment implications of country and sovereign risk. We explain how sovereign debt instruments affect the risk-return characteristics of an investment portfolio, and we demonstrate how to construct optimal portfolios that include government bonds.

Finally, we present and explain a number of tools for mitigating country and sovereign risk, including the use of national and multinational guarantees, restructuring strategies, future flow securitizations, and risk transfer with sovereign credit derivates.

09.15 - 12.00 Financial Crises, Country Risk and Sovereign Default Risk

  • Country and Sovereign Risk: Definitions, Terminology, Sources of Risk
  • The European Debt Crisis and the Future of the Euro
  • Sovereign Debt Crises - the Historical Perspective
  • The Impact of Volatile Commodity Prices and Political Unrest on Country Health

Economic and Financial Foundations of Country Risk Assessment

  • Country Debt Dynamics
  • Near- Medium and Long Term Fiscal Outlooks
  • Default/Moratorium/Restructuring
  • Devaluation
    • Relative price effects
    • Income effects
    • Stock adjustments
    • Country Risk Ratios

12.00 - 13.00 Lunch

13.00 - 16.30 Country Risk Assessment Methodologies

  • Welfare and Social Indicators
  • Macroeconomic Structures of Growth
  • External Indebtedness, Liquidity and Solvency
  • Measuring the Effects of Commodity Price Shocks
  • The Savings-Investment Gap and Domestic Financial Intermediation
  • Growth, Crisis and Governance
  • Case Study and Small Exercise

Country and Sovereign Ratings and their Interpretations

  • Global Country Risk Ratings
    • Specialized ranking firms
    • Export credit agencies
    • Global country risk ranking methods
  • Country (Sovereign) Credit Risk Ratings
    • The methodologies of major credit rating agencies (Moody's, S&P and Fitch)
    • Sovereign debt ratings and their interpretations
    • The impact of ratings on sovereign bond markets (spreads etc.)
  • Case Study and Small Exercise

Day Two

09.00 - 09.15 Brief Recap

09.15 - 12.00 Quantitative Risk Models for Country and Sovereign Risk

  • Econometric and Mathematical Models
  • Value-at-Risk
  • Principal Components Analysis
  • Models for Assessment of Credit Risk
    • Probabilities of default using historical data
    • Probabilities of default using credit spreads
    • CountryMetrics
    • Loss given default and credit VaR
    • Incorporating correlation and contagion
  • Case Study and Small Exercise

International Portfolio Investment Analysis

  • Investment Risk
    • The Macro CAPM
    • Measuring political risk as an insurance premium
  • International Portfolio and Country Risk Management
    • The impact of country risk on international portfolio investment
    • The International Capital Asset Pricing Model (ICAPM)
    • Limitations of the ICAPM
  • Case Study and Small Exercise

12.00 - 13.00 Lunch

13.00 - 16.30 Hedging Country and Sovereign Risk

  • Overview of Country and Sovereign Risk Mitigation Instruments
  • National Export Credit Agencies
  • Multilateral Risk Guarantee Institutions
  • Public and private risk guarantee institutions
  • The Market Based Approach
  • Using Project Finance and Future Flow Securitizations to Mitigate Country Risk
  • Hedging Sovereign Risk with Credit Derivatives
    • Single-country hedging
    • Macro-hedging
  • Regulatory Aspects (Basel III, Solvency II etc.)
  • Case Study and Small Exercise

Evaluation and Termination of the Seminar

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