Sunday, March 15, 2009

country risk

country risk ,also called transfer risk or country transfer risk ,arises where an bligation is not in the domestic currency of the country where it occurs .
it is traditionally thought of as arising in asituation where alending is made cross border and the risk is that acountry may be unwilling or unable to meet it is foreign currency obligations .it is separate from the credit risk of the borrower .the borrower can be solvent and able to repay the dept but is prevented from remitting hard currency outside the country because of the imposition of exchange control or the country simply running out of foreign exchange ,an example would be a US dollar lending acompany in adeveloping country . if that country ran short of us dollars ,the company would not be able to find the hard currency to meet the obligation .
Although country risk is commonly thought of as being across border risk , it can also arise in some demestic situations involving foreign currency lending .for example .abank in adeveloping country might run US dollar deposit accounts for that country is residents .it might lend those us dollars to businesses wanting to take advantage of lower US dollar interest rates than exist for the domestic currency ,the imposition of exchange control result in the state taking full control of all hard currency balance and incoming hard currency from exports .IN such circumstances ,the borrower may not be able to access the US dollars needed to meet the obligation .

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