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.

Do Households Have Rational Expectations on Future Consumption? Evidence from the Finnish Consumer Survey

Ever since its initial introduction some fifty years ago, the rational expectations paradigm has dominated the way economic theory handles uncertainty. The main assertion made by John F. Muth (1961), seen by many as the father of the paradigm, is that expectations of rational economic agents should essentially be equal to the predictions of relevant economic theory, since rational agents should use information available to them in an optimal way. This assumption often has important consequences on the results and interpretations of the models where it is applied. Although the rational expectations assumption can be applied to virtually any economic theory, the focus in this thesis is on macroeconomic theories of consumption, especially the Rational Expectations–Permanent Income Hypothesis proposed by Robert E. Hall in 1978. The much-debated theory suggests that, assuming that agents have rational expectations on their future income, consumption decisions should follow a random walk, and the best forecast of future consumption level is the current consumption level. Then, changes in consumption are unforecastable. This thesis constructs an empirical test for the Rational Expectations–Permanent Income Hypothesis using Finnish Consumer Survey data as well as various Finnish macroeconomic data. The data sample covers the years 1995–2010. Consumer survey data may be interpreted to directly represent household expectations, which makes it an interesting tool for this particular test. The variable to be predicted is the growth of total household consumption expenditure. The main empirical result is that the Consumer Confidence Index (CCI), a balance figure computed from the most important consumer survey responses, does have statistically significant predictive power over the change in total consumption expenditure. The history of consumption expenditure growth itself, however, fails to predict its own future values. This indicates that the CCI contains some information that the history of consumption decisions does not, and that the consumption decisions are not optimal in the theoretical context. However, when conditioned on various macroeconomic variables, the CCI loses its predictive ability. This finding suggests that the index is merely a (partial) summary of macroeconomic information, and does not contain any significant private information on consumption intentions of households not directly deductible from the objective economic variables. In conclusion, the Rational Expectations–Permanent Income Hypothesis is strongly rejected by the empirical results in this thesis. This result is in accordance with most earlier studies conducted on the topic.

Assessing organizational culture in complex sociotechnical systems : Methodological evidence from studies in nuclear power plant maintenance organizations

Failures in industrial organizations dealing with hazardous technologies can have widespread consequences for the safety of the workers and the general population. Psychology can have a major role in contributing to the safe and reliable operation of these technologies. Most current models of safety management in complex sociotechnical systems such as nuclear power plant maintenance are either non-contextual or based on an overly-rational image of an organization. Thus, they fail to grasp either the actual requirements of the work or the socially-constructed nature of the work in question. The general aim of the present study is to develop and test a methodology for contextual assessment of organizational culture in complex sociotechnical systems. This is done by demonstrating the findings that the application of the emerging methodology produces in the domain of maintenance of a nuclear power plant (NPP). The concepts of organizational culture and organizational core task (OCT) are operationalized and tested in the case studies. We argue that when the complexity of the work, technology and social environment is increased, the significance of the most implicit features of organizational culture as a means of coordinating the work and achieving safety and effectiveness of the activities also increases. For this reason a cultural perspective could provide additional insight into the problem of safety management. The present study aims to determine; (1) the elements of the organizational culture in complex sociotechnical systems; (2) the demands the maintenance task sets for the organizational culture; (3) how the current organizational culture at the case organizations supports the perception and fulfilment of the demands of the maintenance work; (4) the similarities and differences between the maintenance cultures at the case organizations, and (5) the necessary assessment of the organizational culture in complex sociotechnical systems. Three in-depth case studies were carried out at the maintenance units of three Nordic NPPs. The case studies employed an iterative and multimethod research strategy. The following methods were used: interviews, CULTURE-survey, seminars, document analysis and group work. Both cultural analysis and task modelling were carried out. The results indicate that organizational culture in complex sociotechnical systems can be characterised according to three qualitatively different elements: structure, internal integration and conceptions. All three of these elements of culture as well as their interrelations have to be considered in organizational assessments or important aspects of the organizational dynamics will be overlooked. On the basis of OCT modelling, the maintenance core task was defined as balancing between three critical demands: anticipating the condition of the plant and conducting preventive maintenance accordingly, reacting to unexpected technical faults and monitoring and reflecting on the effects of maintenance actions and the condition of the plant. The results indicate that safety was highly valued at all three plants, and in that sense they all had strong safety cultures. In other respects the cultural features were quite different, and thus the culturally-accepted means of maintaining high safety also differed. The handicraft nature of maintenance work was emphasised as a source of identity at the NPPs. Overall, the importance of safety was taken for granted, but the cultural norms concerning the appropriate means to guarantee it were little reflected. A sense of control, personal responsibility and organizational changes emerged as challenging issues at all the plants. The study shows that in complex sociotechnical systems it is both necessary and possible to analyse the safety and effectiveness of the organizational culture. Safety in complex sociotechnical systems cannot be understood or managed without understanding the demands of the organizational core task and managing the dynamics between the three elements of the organizational culture.

Evidence in European Asylum Procedures

This thesis explores the particular framework of evidentiary assessment of three selected appellate national asylum procedures in Europe and discusses the relationship between these procedures, on the one hand, and between these procedures and other legal systems, including the EU legal order and international law, on the other. A theme running throughout the thesis is the EU strivings towards approximation of national asylum procedures and my study analyses the evidentiary assessment of national procedures with the aim of pinpointing similarities and differences, and the influences which affect these distinctions. The thesis first explores the frames construed for national evidentiary solutions by studying the object of decision-making and the impact of legal systems outside the national. Second, the study analyses the factual evidentiary assessment of three national procedures - German, Finnish and English. Thirdly, the study explores the interrelationship between these procedures and the legal systems influencing them and poses questions in relation to the strivings of EU and methods of convergence. The thesis begins by stating the framework and starting points for the research. It moves on to establish keys of comparison concerning four elements of evidentiary assessment that are of importance to any appellate asylum procedure, and that can be compared between national procedures, on the one hand, and between international, regional and national frameworks, on the other. Four keys of comparison are established: the burden of proof, demands for evidentiary robustness, the standard of proof and requirements for the methods of evidentiary assessment. These keys of comparison are then identified in three national appellate asylum procedures, and in order to come to conclusions on the evidentiary standards of the appellate asylum procedures, relevant elements of the asylum procedures in general are presented. Further, institutional, formal and procedural matters which have an impact on the evidentiary standards in the national appellate procedures are analysed. From there, the thesis moves on to establish the relationship between national evidentiary standards and the legal systems which affect them, and gives reasons for similarities and divergences. Further, the thesis studies the impact of the national frameworks on the regional and international level. Lastly, the dissertation makes a de lege ferenda survey of the relationship between EU developments, the goal of harmonization in relation to national asylum procedures and the particular feature of evidentiary standards in national appellate asylum procedures. Methodology The thesis follows legal dogmatic methods. The aim is to analyse legal norms and legal constructions and give them content and context. My study takes as its outset an understanding of the purposes for legal research also regarding evidence and asylum to determine the contents of valid law through analysis and systematization. However, as evidentiary issues traditionally are normatively vaguely defined, a strict traditional normative dogmatic approach is not applied. For the same reason a traditionalist and strict legal positivism is not applied. The dogmatics applied to the analysis of the study is supported by practical analysis. The aim is not only to reach conclusions concerning the contents of legal norms and the requirements of law, but also to study the use and practical functioning of these norms, giving them a practcial context. Further, the study relies on a comparative method. A functionalist comparative method is employed and keys of comparison are found in evidentiary standards of three selected national appellate asylum procedures. The functioning equivalences of German, Finnish and English evidentiary standards of appellate asylum procedures are compared, and they are positioned in an European and international legal setting. Research Results The thesis provides results regarding the use of evidence in national appellate asylum procedures. It is established that evidentiary solutions do indeed impact on the asylum procedure and that the results of the procedure are dependent on the evidentiary solutions made in the procedures. Variations in, amongst other things, the interpretation of the burden of proof, the applied standard of proof and the method for determining evidentiary value, are analysed. It is established that national impacts play an important role in the adaptation of national appellate procedures to external requirements. Further, it is established that the impact of national procedures on as well the international framework as on EU law varies between the studied countries, partly depending on the position of the Member State in legislative advances at the EU level. In this comparative study it is, further, established that the impact of EU requirements concerning evidentiary issues may be have positive as well as negative effects with regard to the desired harmonization. It is also concluded that harmonization using means of convergence that primaly target legal frameworks may not in all instances be optimal in relation to evidentiary standards, and that more varied and pragmatic means of convergence must be introduced in order to secure harmonization also in terms of evidence. To date, legal culture and traditions seem to prevail over direct efforts at procedural harmonization.