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.

Credit Default Swaps and Insurance: Against the Potts Opinion

Little attention has been given to the possibility that CDS transactions might be construed as insurance contracts in English law. This article challenges the widespread “Potts opinion”, which states that CDSs are not insurance, because they do not require the protection buyer to sustain a loss or to have an insurable interest in the subject matter. CDSs often do provide protection against loss that the buyer is exposed to; loss indemnity is not a necessary characterisation of an insurance contract; insurable interest does not form part of the definition of insurance, but is an additional requirement of valid insurance; and what matters is the substance not the form of the contract. The situation in the US and Australia is also briefly considered.

Aineellista ja aineetonta turvaa : Ruokakunnat, ekologis-taloudelliset resurssit ja kontaktinmuodostus Valkealassa 1630 1750

Material and immaterial security. Households, ecological and economic resources and formation of contacts in Valkeala parish from the 1630s to the 1750s. The geographical area of the thesis, Valkeala parish in the region of Kymenlaakso, is a very interesting area owing to its diversity, both in terms of natural setting and economic and cultural structure. The study begins by outlining the ecological and economic features of Valkeala and by analysing household structures. The main focus of the research lies in the contacts of the households with the outside world. The following types of contacts are chosen as indicators of the interaction: trade and credit relations, guarantees, co-operation, marriages and godparentage. The main theme of the contact analysis is to observe the significance of three factors, namely geographical extent, affluence level and kinship, to the formation of contacts. It is also essential to chart the interdependencies between ecological and economic resources, changes in the structure of households and the formation of contacts during the period studied. The time between the 1630s and the 1750s was characterized by wars, crop losses and population changes, which had an effect on the economic framework and on the structural variation of households and contact fields. In the 17th and 18th centuries Valkeala could be divided, economically, into two sections according to the predominant cultivation technique. The western area formed the field area and the eastern and northern villages the swidden area. Multiple family households were dominant in the latter part of the 17th century, and for most of the study period, the majority of people lived in the more complex households rather than in simple families. Economic resources had only a moderate impact on the structure of contacts. There was a clear connection between bigger household size and the extent and intensity of contacts. The jurisdictional boundary that ran across Valkeala from the northwest to the southeast and divided the parish into two areas influenced the formation of contacts more than the parish boundaries. Support and security were offered largely by the primary contacts with one s immediate family, neighbours and friends. Economic support was channelled from the wealthier to the less well off by credits. Cross-marriages, cross-godparentage and marital networks could be seen as manifestations of an aim towards stability and the joining of resources. It was essential for households both to secure the workforce needed for a minimum level of subsistence and to ensure the continuation of the family line. These goals could best be reached by complex households that could adapt to the prevailing circumstances and also had wider and more multi-layered contacts offering material and immaterial security.