Editing Credit risk (section)

=== Sovereign risk ===
[[Sovereign credit risk]] is the risk of a government being unwilling or unable to meet its loan obligations, or reneging on loans it guarantees. Many countries have faced sovereign risk in the [[late-2000s global recession]]. The existence of such risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country. Firstly one should consider the sovereign risk quality of the country and then consider the firm's credit quality.<ref>{{cite book | author1 = Cary L. Cooper | author2 = Derek F. Channon | title = The Concise Blackwell Encyclopedia of Management | year = 1998 | publisher = Wiley | isbn = 978-0-631-20911-9 | url-access = registration | url = https://archive.org/details/conciseblackwell0000unse }}</ref>

Five macroeconomic variables that affect the probability of [[sovereign debt]] rescheduling are:<ref name="sovrisk">{{cite book | author = Frenkel, Karmann and Scholtens| title = Sovereign Risk and Financial Crises| year = 2004 |publisher = Springer|isbn = 978-3-540-22248-4}}</ref>

* [[Debt service ratio]]
* [[Import ratio]]
* Investment ratio
* Variance of export revenue
* Domestic money supply growth

The probability of rescheduling is an increasing function of debt service ratio, import ratio, the variance of export revenue and domestic money supply growth.<ref name="sovrisk"/> The likelihood of rescheduling is a decreasing function of investment ratio due to future economic productivity gains. Debt rescheduling likelihood can increase if the investment ratio rises as the foreign country could become less dependent on its external creditors and so be less concerned about receiving credit from these countries/investors.<ref name="Saunders">{{cite book |author1=Cornett, Marcia Millon  |author2=Saunders, Anthony | title = Financial Institutions Management: A Risk Management Approach, 5th Edition | year = 2006 | publisher = McGraw-Hill | isbn = 978-0-07-304667-9 |title-link=Risk management }}</ref>