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.

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.

The political econmoy of state government debt : an analysis of constitutional limitations (1961-1990)

Over the past decade, scholarly interest concerning the use of limitations to constrain government spending and taxing has noticeably increased. The call for constitutional restrictions can be credited, in part, to Washington's apparent inability to legislate any significant reductions in government expenditures or in the size of the national debt. At the present time, the federal government is far from instituting any constitutional limitations on spending or borrowing; however, the states have incorporated many controls on revenues and expenditures, the oldest being strictures on full faith and credit borrowing. This dissertations examines the efficacy of these restrictions on borrowing across the states (excluding Alaska) for the period dating from 1961 to 1990 and also studies the limitations on taxing and spending synonymous with the Tax Revolt.

We include socio-economic information in our calculations to control for factors other than the institutional variables that affect state borrowing levels. Our results show that certain constitutional restrictions (in particular, the referendum requirement and the dollar debt limit) are more effective than others. The apparent ineffectiveness of other limitations, such as the flexible debt limit, seem related to the bindingness of the limitations in at least half of the cases. Other variables, such as crime rates, number of schoolage children, and state personal income do affect the levels of full faith and credit debt, but not as strongly as the limitations. While some degree of circumvention can be detected (the amount of full faith and credit debt does inversely affect the levels of nonguaranteed debt), it is so small when compared to the effectiveness of the constitutional restrictions that it is almost negligible. The examination of the tax revolt era limitations yielded quite similar conclusions, with the additional fact that constitutional restrictions appear more binding than statutory ones. Our research demonstrates that constitutional limitations on borrowing can be applied effectively to constrain excessive borrowing, but caution must be used. The efficacy of these restrictions decrease dramatically as the number of loopholes increase.

The basque ecological debt: global socioecological impacts of a small open economy

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The impact of economic crises on social inequalities in health: what do we know so far?

Since 2008, Western countries are going through a deep economic crisis whose health impacts seem to be fundamentally counter-cyclical: when economic conditions worsen, so does health, and mortality tends to rise. While a growing number of studies have presented evidence on the effect of crises on the average population health, a largely neglected aspect of research is the impact of crises and the related political responses on social inequalities in health, even if the negative consequences of the crises are primarily borne by the most disadvantaged populations. This commentary will reflect on the results of the studies that have analyzed the effect of economic crises on social inequalities in health up to 2013. With some exceptions, the studies show an increase in health inequalities during crises, especially during the Southeast Asian and Japanese crises and the Soviet Union crisis, although it is not always evident for both sexes or all health or socioeconomic variables. In the Nordic countries during the nineties, a clear worsening of health equity did not occur. Results about the impacts of the current economic recession on health equity are still inconsistent. Some of the factors that could explain this variability in results are the role of welfare state policies, the diversity of time periods used in the analyses, the heterogeneity of socioeconomic and health variables considered, the changes in the socioeconomic profile of the groups under comparison in times of crises, and the type of measures used to analyze the magnitude of social inequalities in health. Social epidemiology should further collaborate with other disciplines to help produce more accurate and useful evidence about the relationship between crises and health equity.

Safety net or debt net?: ties between marketing and credit in coastal Bangladesh

Three fishing communities in coastal Bangladesh namely: 1) Hindu community near Chittagong; 2) Muslim community in Rehania; and 3) Bhuddist community of Rakhaipara were studied, and each shared the same credit marketing system.

A Escola Normal de Juiz de Fora: crises e permanências (1881-1911)

A motivação apresentada nesta dissertação alimentou-se pela instabilidade evidenciada no processo de criação e na tentativa de consolidação da Escola Normal de Juiz de Fora. Sendo alvo de constantes críticas e debates, o papel da escola normal, assim como sua permanência, motivou propostas, reformas e manifestações, que envolveram não só o poder político, mas também a sociedade. Tais apontamentos foram observados tanto em periódicos da cidade, como o Jornal do Commercio e o Correio de Minas, quanto em documentos encontrados no Arquivo Público Mineiro, como relatórios de inspetores e correspondências de professores.Algumas das publicações presentes nesses periódicos expressaram e, de certa forma, mobilizaram a população a tomar atitudes contra a supressão da mesma, através de abaixo-assinados e representações enviadas ao governo do estado, muitas vezes enaltecendo não só a escola normal, mas principalmente a cidade de Juiz de Fora, considerada a principal da Zona da Mata mineira. Assim, foram mapeadas as discussões sobre a instituição, levantando questões sobre o posicionamento dos diferentes atores sociais acerca da instituição que, mesmo após sua supressão, não deixou de ser alvo de debates. Ainda, teceu-se algumas reflexões acerca da Reforma do Ensino Primário e Normal de João Pinheiro (1906), no que se refere ao ensino normal, mais especificamente no contexto juizforano. Para tanto, foram abordadas questões sobre a preferência da mulher para o magistério,o papel do professor e os institutos equiparados à Escola Normal Modelo de Belo Horizonte. Esse estudo concluiu que as determinações políticas não são produzidas apenas pelos discursos e decisões dos governantes, mas também são influenciáveis e podem ser modificadas por pressões de outros grupos sociais. Tais grupos sociais são formados por indivíduos com ideias e objetivos semelhantes, fazendo parte de um lugar e de uma posição social que os permitam circular e se manifestar em espaços que atinjam proporções significativas, como é o caso da imprensa.

Brasil e México frente aos Estados Unidos: crises bilaterais assimétricas e coalizões domésticas de política externa

Os desequilíbrios na escala de capacidades militares, econômicas, tecnológicas, de território e população entre Estados formalmente soberanos configuram um sistema internacional de relações assimétricas que pressupõe desafios relativamente maiores para as políticas externas dos países periféricos. Entretanto, em contextos de assimetria em uma relação bilateral, é possível constatar que a parte fraca pode, sob certas condições, sustentar com sucesso preferências divergentes das formuladas pela contraparte mais forte. Esta é uma pesquisa histórica comparativa que, através da comparação entre casos de divergência e crise na história das relações bilaterais do Brasil e do México frente aos Estados Unidos, se propõe a indagar que condições permitem a sustentação das preferências formuladas pelos governantes da parte mais fraca de uma díade assimétrica. Uma afirmação central desta pesquisa postula que variáveis de política doméstica devem ser levadas em conta para explicar o sucesso da parte fraca, em particular, a formação de coalizões de apoio à política externa amplas, plurais e heterogêneas. A comparação inclui casos de sucesso e insucesso na sustentação de preferências formuladas pelos governos do Brasil e do México, de forma a avaliar a presença ou ausência desse tipo de coalizão em cada conjuntura. A partir da consulta de estudos prévios, jornais e revistas publicadas nas respectivas épocas, arquivos diplomáticos e documentos oficiais, foi possível mapear o omportamento de atores relevantes para a política externa em cada caso e avaliar sua adesão ou não às preferências postuladas pelos responsáveis da condução da política externa. A inclusão na análise de duas conjunturas de alinhamento dos governantes do Brasil e do México com as preferências de Washington permitiu afirmar a importância do apoio interno para a sustentação de preferências capazes de gerar clivagens muito intensas no âmbito das relações do Brasil e do México frente aos Estados Unidos.