What is Country Risk?
Updated: June 13, 2013 at 11:39 AM
Country Risk Definition. Country Risk refers to the probability that changes in the business environment in another country where you are doing business may adversely impact your operations or payment for imports resulting in a financial loss. Country Risk also includes Sovereign Risk, which is a subset of risk specifically related to the government or one of its agencies refusing to comply with the terms of a loan agreement. Causes of Country Risk include political, macroeconomic mismanagement, war or labor unrest resulting in work stoppages. Political changes may come about due to a change in leadership, control by a ruling party, or war. New economic policies may be instituted resulting in expropriation of assets, nationalization of private companies, currency controls, inability to expatriate profits, higher taxes or tariffs, and a host of minor impacts. On a macroeconomic level, countries may pursue unsound monetary policy resulting in inflation, recession, higher interest rates, and shortages in hard currency reserves. The recent debt problems in Europe highlighted sovereign risk issues in Greece and other member states of the Eurozone when loan defaults were a real concern for banks holding the respective loan paper.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.