Term
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Definition
| The risk of a foreign government limiting or preventing domestic borrowers from repaying debt. |
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Term
| Whats the 2 step decision process that creditors should make when lending to firms located in a foreign country? |
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Definition
1 - Examine the sovereign risk quality of the country in which the firm resides
2 - Examine the credit quality of the firm
Sovereign risk considerations should dominate considerations of private credit risk |
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Term
| What is debt repudiation? |
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Definition
| Debt repudiation is the refusal of a country to honour debt agreements |
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Term
| What is debt rescheduling? |
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Definition
| occurs when a country (or a group of creditors in that country) declares a suspension of, or delay in, it's current and future debt obligations and seeks to alter the debts contractural terms such as interest rates and debt maturity. |
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Term
| Why is rescheduling of international loans rather than bond financing more likely to occur? |
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Definition
- fewer lenders involved with bank loans (few banks compared to thousands of bond holders). Thus negotiation with banks is easier.
- Many loan syndicates comprise the same group of banks.
- Many international loan contracts have cross-default provisions. These state if a country were to default on just one of its loans, all other outstanding loans would be in default as well.
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Term
| Explain the debt service ratio? |
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Definition
DSR = (interest plus amortisation on debt) / exports
- exporting is the primary means by which a LDC genertes hard currency.
Positive relationship between DSR and the PD of a country |
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Term
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Definition
IR = total imports / total foreign exchange reserves
The LDC pays for imports with it's foreign exchange reserves. A country that imports a larger number of goods than other countries is going to be more likely to reschedule it's debt.
IR and the PD of rescheduling is positively related. |
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Term
| Explain investment ratio: |
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Definition
INVR = real investment / GNP
measurse the amount of funds that a country allocates to real investment (such as factories and machines) rather than consumption.
A higher ratio means tha tthe economcy should be more productive in the futures.
There is a negative relationship between INVR and the probability of a country rescheduling.
(alternative view states that a high INVR leads to increased likelihood of restructuring as the LDC is in a stronger bargaining position). |
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Term
| Explain variance of export revenue: |
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Definition
VAREX = std2ER
reflects the fact that event revenues may be highly variable due to quantity risk and price risk
The more volatile an LDC export earnigns the less certain creditors can be that paymetn commitments will be met in the future.
Positive relationship between VAREX and the probability of rescheduling
Quantity risk is the risk that the production of raw commodities that the LDC sells in other countries is subject to surpluses or shortages
Price risk is the risk that the international rpices at which teh LDC can sell its exports may be highly volatile
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Term
| Explain Domestic Money Supply Growth: |
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Definition
MG = Δmoney supply / money supply
Positive relationship between MG and the possibility of a country rescheduling it's debt obligations |
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