Political Risk in Credit Evaluation: Empirical Studies and Survey Results

Financing trade between economic agents located in different countries is affected by many types of risks, resulting from incomplete information about the debtor, the problems of enforcing international contracts, or the prevalence of political and financial crises. Trade is important for economic development and the availability of trade finance is essential, especially for developing countries. Relatively few studies treat the topic of political risk, particularly in the context of international lending. This thesis explores new ground to identify links between political risk and international debt defaults. The core hypothesis of the study is that the default probability of debt increases with increasing political risk in the country of the borrower. The thesis consists of three essays that support the hypothesis from different angles of the credit evaluation process. The first essay takes the point of view of an international lender assessing the credit risk of a public borrower. The second investigates creditworthiness assessment of companies. The obtained results are substantiated in the third essay that deals with an extensive political risk survey among finance professionals in developing countries. The financial instruments of core interest are export credit guaranteed debt initiated between the Export Credit Agency of Finland and buyers in 145 countries between 1975 and 2006. Default events of the foreign credit counterparts are conditioned on country-specific macroeconomic variables, corporate-specific accounting information as well as political risk indicators from various international sources. Essay 1 examines debt issued to government controlled institutions and conditions public default events on traditional macroeconomic fundamentals, in addition to selected political and institutional risk factors. Confirming previous research, the study finds country indebtedness and the GDP growth rate to be significant indicators of public default. Further, it is shown that public defaults respond to various political risk factors. However, the impact of the risk varies between countries at different stages of economic development. Essay 2 proceeds by investigating political risk factors as conveivable drivers of corporate default and uses traditional accounting variables together with new political risk indicators in the credit evaluation of private debtors. The study finds links between corporate default and leverage, as well as between corporate default and the general investment climate and measeures of conflict in the debtor country. Essay 3 concludes the thesis by offering survey evidence on the impact of political risk on debt default, as perceived and experienced by 103 finance professionals in 38 developing countries. Taken together, the results of the thesis suggest that various forms of political risk are associated with international debt defaults and continue to pose great concerns for both international creditors and borrowers in developing countries. The study provides new insights on the importance of variable selection in country risk analysis, and shows how political risk is actually perceived and experienced in the riskier, often lower income countries of the global economy.

Foreign Capital and Finland : Central government's first period of reliance on international financial markets, 1862-1938

The main objective of the study is to evaluate the Finnish central government s foreign borrowing between the years 1862 and 1938. Most of this period was characterised by deep capital market integration that bears resemblance to the liberal world financial order at the turn of the millennium. The main aim is to analyse the credit risk associated with the state and its determination by evaluating the world financial market centres perception of Finland. By doing this, the study is also expected to provide an additional dimension to Finland s political and economic history by incorporating into the research the assessments of international capital markets regarding Finland during a period that witnessed profound political and economic changes in Finnish society. The evaluation of the credit risk mainly relies on exchange-rate risk free time series of the state s foreign bonds. They have been collected from quotations in the stock exchanges in Helsinki, Hamburg, Paris and London. In addition, it investigates Finland s exposure to short-term debt and Moody s credit ratings assigned to Finland. The study emphasises the importance of the political risk. It suggests that the hey-day of the state s reliance on foreign capital markets took place during last few decades of the 19th century when Finland enjoyed a wide autonomy in the Russian Empire and prudently managed its economy, highlighted in Finland s adherence to the international gold standard. Political confrontations in Finland and, in particular, in Russia and the turbulence of the world financial system prevented the return of this beneficial position again. Through its issuance of foreign bonds the state was able to import substantial amounts of foreign capital, which was sorely needed to foster economic development in Finland. Moreover, the study argues that the state s presence in the western capital markets not only had economic benefits, but it also increased the international awareness of Finland s distinct and separate status in the Russian Empire and later underlined its position as an independent republic.

Monetary Policy Implementation in the Interbank Market

The liquidity crisis that swept through the financial markets in 2007 triggered multi-billion losses and forced buyouts of some large banks. The resulting credit crunch is sometimes compared to the great recession in the early twentieth century. But the crisis also serves as a reminder of the significance of the interbank market and of proper central bank policy in this market. This thesis deals with implementation of monetary policy in the interbank market and examines how central bank tools affect commercial banks' decisions. I answer the following questions: • What is the relationship between the policy setup and interbank interest rate volatility? (averaging reserve requirement reduces the volatility) • What can explain a weak relationship between market liquidity and the interest rate? (high reserve requirement buffer) • What determines banks' decisions on when to satisfy the reserve requirement? (market frictions) • How did the liquidity crisis that began in 2007 affect interbank market behaviour? (resulted in higher credit risk and trading frictions as well as expected liquidity shortage)

Corporate Funding on the European Debt Capital Market

The integrated European debt capital market has undoubtedly broadened the possibilities for companies to access funding from the public and challenged investors to cope with an ever increasing complexity of its market participants. Well into the Euro-era, it is clear that the unified market has created potential for all involved parties, where investment opportunities are able to meet a supply of funds from a broad geographical area now summoned under a single currency. Europe’s traditionally heavy dependency on bank lending as a source of debt capital has thus been easing as corporate residents are able to tap into a deep and liquid capital market to satisfy their funding needs. As national barriers eroded with the inauguration of the Euro and interest rates for the EMU-members converged towards over-all lower yields, a new source of debt capital emerged to the vast majority of corporate residents under the new currency and gave an alternative to the traditionally more maturity-restricted bank debt. With increased sophistication came also an improved knowledge and understanding of the market and its participants. Further, investors became more willing to bear credit risk, which opened the market for firms of ever lower creditworthiness. In the process, the market as a whole saw a change in the profile of issuers, as non-financial firms increasingly sought their funding directly from the bond market. This thesis consists of three separate empirical studies on how corporates fund themselves on the European debt capital markets. The analysis focuses on a firm’s access to and behaviour on the capital market, subsequent the decision to raise capital through the issuance of arm’s length debt on the bond market. The specific areas considered are contributing to our knowledge in the fields of corporate finance and financial markets by considering explicitly firms’ primary market activities within the new market area. The first essay explores how reputation of an issuer affects its debt issuance. Essay two examines the choice of interest rate exposure on newly issued debt and the third and final essay explores pricing anomalies on corporate debt issues.

With Good Reputation Size Does not Matter: Issue Frequency and the Determinants of Debt Maturity

This paper examines empirically the effect firm reputation has on the determinants of debt maturity. Utilising data from European primary bond market between 1999 and 2005, I find that the maturity choice of issuers with a higher reputation is less sensitive to macroeconomic conditions, market credit risk-premiums, prevailing firm credit quality and size of the debt issue. The annualised coupon payments are shown to be a significant factor in determining the debt maturity and reveal a monotonously increasing relationship between credit quality and debt maturity once controlled for. Finally, I show that issuers lacking a credit rating have an implied credit quality positioned between investment-grade and speculative-grade debt.

Methicillin Resistance In Staphylococci : Horizontal Transfer of Mobile Genetic Element (SCCmec) Between Staphylococcal Species

Regardless of the existence of antibiotics, infectious diseases are the leading causes of death in the world. Staphylococci cause many infections of varying severity, although they can also exist peacefully in many parts of the human body. Most often Staphylococcus aureus colonises the nose, and that colonisation is considered to be a risk factor for spread of this bacterium. S. aureus is considered to be the most important Staphylococcus species. It poses a challenge to the field of medicine, and one of the most problematic aspects is the drastic increase of the methicillin-resistant S. aureus (MRSA) strains in hospitals and community world-wide, including Finland. In addition, most of the clinical coagulase-negative staphylococcus (CNS) isolates express resistance to methicillin. Methicillin-resistance in S. aureus is caused by the mecA gene that encodes an extra penicillin-binding protein (PBP) 2a. The mecA gene is found in a mobile genomic island called staphylococcal chromosome cassette mec (SCCmec). The SCCmec consists of the mec gene and cassette chromosome recombinase (ccr)gene complexes. The areas of the SCCmec element outside the ccr and mec complex are known as the junkyard J regions. So far, eight types of SCCmec(SCCmec I- SCCmec VIII) and a number of variants have been described. The SCCmec island is an acquired element in S. aureus. Lately, it appears that CNS might be the storage place of the SCCmec that aid the S. aureus by providing it with the resistant elements. The SCCmec is known to exist only in the staphylococci. The aim of the present study was to investigate the horizontal transfer of SCCmec between the S. aureus and CNS. One specific aim was to study whether or not some methicillin-sensitive S. aureus (MSSA) strains are more inclined to receive the SCCmec than others. This was done by comparing the genetic background of clinical MSSA isolates in the health care facilities of the Helsinki and Uusimaa Hospital District in 2001 to the representatives of the epidemic MRSA (EMRSA) genotypes, which have been encountered in Finland during 1992-2004. Majority of the clinical MSSA strains were related to the EMRSA strains. This finding suggests that horizontal transfer of SCCmec from unknown donor(s) to several MSSA background genotypes has occurred in Finland. The molecular characteristics of representative clinical methicillin-resistant S. epidermidis (MRSE) isolates recovered in Finnish hospitals between 1990 and 1998 were also studied, examining their genetic relation to each other and to the internationally recognised MRSE clones as well, so as to ascertain the common traits between the SCCmec elements in MRSE and MRSA. The clinical MRSE strains were genetically related to each other; eleven PFGE types were associated with sequence type ST2 that has been identified world-wide. A single MRSE strain may possess two SCCmec types III and IV, which were recognised among the MRSA strains. Moreover, six months after the onset of an outbreak of MRSA possessing a SCCmec type V in a long-term care facility in Northern Finland (LTCF) in 2003, the SCCmec element of nasally carried methicillin-resistant staphylococci was studied. Among the residents of a LTCF, nasal carriage of MR-CNS was common with extreme diversity of SCCmec types. MRSE was the most prevalent CNS species. Horizontal transfer of SCCmec elements is speculated to be based on the sharing of SCCmec type V between MRSA and MRSE in the same person. Additionally, the SCCmec element of the clinical human S. sciuri isolates was studied. Some of the SCCmec regions were present in S. sciuri and the pls gene was common in it. This finding supports the hypothesis of genetic exchange happening between staphylococcal species. Evaluation of the epidemiology of methicillin-resistant staphylococcal colonisation is necessary in order to understand the apparent emergence of these strains and to develop appropriate control strategies. SCCmec typing is essential for understanding the emergence of MRSA strains from CNS, considering that the MR-CNS may represent the gene pool for the continuous creation of new SCCmec types from which MRSA might originate.