Political Risk Definition. What is Political Risk? This refers to the exposure an investor, a business or another government faces if the policies of the resident country’s government suddenly change, thereby subjecting the asset holder to the possibility of loss or the complete abandonment of ownership rights. Investors, businesses and governments typically assess country risk exposures by including financial, economic and political risk. 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.
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