MICHEL HENRY BOUCHET is Professor of Finance at CERAM-Sophia Antipolis (France), Scientific Director of the MSc in International Finance, and Head of the Chair 'Global Finance'. He is also Managing Director of DEFI/Developing Finance, Paris. After an international banking career at BNP, the World Bank and the Washington-based Institute of International Finance, Dr. Bouchet was founder and CEO of Owen Stanley Financial, a specialized advisory firm dealing with debt restructuring strategy for country governments. Dr. Bouchet graduated in Economics from the University of Paris and IEP-Paris. He also holds an M.A. and a Ph.D from USC (Columbia-USA). EPHRAÏM CLARK is Professor of Finance at Middlesex University, London, and Visiting Professor at ESC Lille, France, with extensive teaching experience in Europe and the USA. He is Founding Editor of the European Journal of Finance, Co-editor of Treasury Affairs, and Associate Editor of the International Journal of Finance. Professor Clark is the author of eight books and over 50 articles in academic and professional journals in the field of international risk management, and he also has extensive experience in private business and as a consultant.BERTRAND GROSLAMBERT after working in Africa as Financial Controller with the French oil group, Total, Dr. Groslambert joined Paris-based FP Consult (now part of Fortis Group), an emerging market investment management company with a US$250 million portfolio. He was equity fund manager specializing in Latin American stock markets. Dr. Groslambert teaches International Finance Strategy and International Risk Management at CERAM. A graduate himself from CERAM, he holds a Doctorate in Economics from Aix-Marseille University, and his areas of expertise include emerging markets and international economics.

• Preface ixAcknowledgments xiForeword by Campbell R. Harvey xiii1 Introduction 11.1 An historical perspective 11.2 Outline of the book 4References 72 An Overview of Country Risk 92.1 A Review of the literature 92.1.1 The terminologies 92.1.2 Definitions of country risk 102.1.3 Sources of risk 132.1.4 Types of investment 132.1.5 The historical context 142.1.6 Different methodologies 152.2 Classification and examples of country risk 162.2.1 Natural disasters 162.2.2 Socio-political risk 172.2.3 Country-specific economic risk 22References 253 The Economic and Financial Foundations of Country Risk Assessment 313.1 Devaluation 323.1.1 Relative price effects: The elasticities approach 323.1.2 Income effects: The absorption approach 333.1.3 Stock adjustments: The monetary approach 383.1.4 Stock adjustments: The portfolio balance approach 413.1.5 Country risk: Ratio analysis 42References 474 Country Risk Assessment Methodologies: The Qualitative, Structural Approach to Country Risk 494.1 Introduction 494.2 Analysis of welfare and social indicators of the development process 514.3 Analysis of the macroeconomic structures of growth 524.4 External indebtedness, liquidity and solvency analysis 574.5 The savings–investment gap and domestic financial intermediation 614.6 Growth, crisis and governance 634.7 The “qualitative” aggregate approach to political risk 694.8 Conclusion 72References 755 Assessment Methodologies: Ratings 795.1 Global country risk ratings 795.1.1 Specialized ranking firms 795.1.2 Export credit agencies 885.1.3 Summary of global country risk ranking methods 905.2 Country credit ratings 935.2.1 Credit rating agencies 945.2.2 Fitch 945.2.3 Moody’s 985.2.4 Standard & Poor’s 1015.2.5 Country rankings published in magazines 1025.2.6 Summary of country credit rating methods 1055.3 Conclusion 109References 1106 Econometric and Mathematical Methods 1156.1 Discriminant analysis 1156.2 Logit and probit models 1176.3 Regression analysis and model building 1186.4 Monte Carlo simulations 1216.5 Value at risk (VaR) 1226.5.1 VaR for a single-asset portfolio 1236.5.2 VaR for a two-asset portfolio 1236.5.3 Other methods for Estimating VaR 1246.6 Principal components analysis 1246.7 Non-linearities and non-parametric estimation 1256.8 Artificial neural networks 1276.9 Multicriteria 127References 1297 Risk Models 1337.1 Credit risk 1337.1.1 Probabilities of default using historical data 1337.1.2 Probabilities of default using interest rate spreads 1337.1.3 Probabilities of default using firm value 1357.1.4 Countrymetrics 1377.1.5 Loss given default 1407.1.6 Credit value at risk 1407.1.7 Credit VaR, default correlation and contagion 1417.2 Investment risk 1427.2.1 Adjusting the expected cash flows 1427.2.2 Adjusting the discount rate 1427.2.3 The Macro CAPM 1447.2.4 Measuring political risk as an insurance premium 145References 1478 International Portfolio Investment Analysis 1498.1 Modern financial theory 1498.2 International portfolio investment and country risk management 1548.2.1 The international portfolio investment panorama 1548.2.2 Impact of country risk on international portfolio investment 1558.2.3 International diversification 1568.2.4 International Capital Asset Pricing Model 1588.3 The Limits of the ICAPM 1598.3.1 The normal distribution 1608.3.2 Portfolio diversification 1618.3.3 The CAPM 1638.3.4 The Bank of America approach 1638.3.5 The Goldman Sachs approach 1648.3.6 The JP Morgan approach 1658.4 Conclusion 165References 1669 Financial Crises in Emerging Market Countries: An Historical Perspective 1719.1 Introduction 1719.2 Historical perspective 1749.2.1 Economic growth-cum-debt process 1749.2.2 Bonds versus loans 1749.2.3 The rising importance of commercial bank lending in the post-WWII era 1759.2.4 The debt crisis and the market-driven menu approach 1769.3 Solving the debt crisis 1779.3.1 Phase I – Buying time with rescheduling 1779.3.2 Phase II – The new money approach 1789.3.3 Phase III – The official concerted approach to debt restructuring 1799.4 Debt reduction instruments 1859.5 The way forward in the early 2000s: Back to the 1890s? 1889.5.1 The return of private capital flows 1889.5.2 The return of bondholders 1899.5.3 The rise in non-debt-creating flows 1909.5.4 The emergence of structured financing 1909.6 Conclusion 191Appendix: The Brady Plan at work in EMCs 192References 19510 Country Risk and Risk Mitigation Instruments 19710.1 Introduction 19710.2 The role of national export credit agencies 19810.3 The role of official multilateral risk guarantee institutions 20110.3.1 The World Bank’s co-financing program 20110.3.2 The role of the International Finance Corporation 20310.3.3 The role of MIGA (Multilateral Investment Guarantee Agency) 20410.4 The risk mitigation role of public and private risk guarantee institutions 20410.5 The role of private providers of specialist insurance for country risk 20510.6 The market-based “menu” approach 20610.6.1 The rise of the London Club debt secondary market of emerging market loans 20810.6.2 Price developments 21110.6.3 Technical supply and demand factors affecting debt prices 21110.6.4 Debt conversion transactions 21210.6.5 Mechanics of debt conversion 21310.6.6 Range of debt conversion transactions 21510.6.7 Official bilateral debt conversion 21710.6.8 Debt conversion: A positive sum game? 218References 22011 Country Risk Assessment: A Matter of Information and Intelligence Gathering 22111.1 Introduction 22111.2 Solvency and liquidity risk: The supply of debt-related information 22311.2.1 Official sources of country risk data and information 22311.2.2 Private sources of country risk data and information 23411.3 FDI-related country risk assessment 23911.3.1 The role of specialized country risk assessment companies 23911.3.2 National public and private information sources 24011.3.3 Think-tanks and risk analysis companies 24111.4 Conclusion 243Appendix: External debt, official information sources 244References 245Glossary 247Index 265

MICHEL HENRY BOUCHET is Professor of Finance at CERAM-Sophia Antipolis (France), Scientific Director of the MSc in International Finance, and Head of the Chair 'Global Finance'. He is also Managing Director of DEFI/Developing Finance, Paris. After an international banking career at BNP, the World Bank and the Washington-based Institute of International Finance, Dr. Bouchet was founder and CEO of Owen Stanley Financial, a specialized advisory firm dealing with debt restructuring strategy for country governments. Dr. Bouchet graduated in Economics from the University of Paris and IEP-Paris. He also holds an M.A. and a Ph.D from USC (Columbia-USA). EPHRAÏM CLARK is Professor of Finance at Middlesex University, London, and Visiting Professor at ESC Lille, France, with extensive teaching experience in Europe and the USA. He is Founding Editor of the European Journal of Finance, Co-editor of Treasury Affairs, and Associate Editor of the International Journal of Finance. Professor Clark is the author of eight books and over 50 articles in academic and professional journals in the field of international risk management, and he also has extensive experience in private business and as a consultant.BERTRAND GROSLAMBERT after working in Africa as Financial Controller with the French oil group, Total, Dr. Groslambert joined Paris-based FP Consult (now part of Fortis Group), an emerging market investment management company with a US$250 million portfolio. He was equity fund manager specializing in Latin American stock markets. Dr. Groslambert teaches International Finance Strategy and International Risk Management at CERAM. A graduate himself from CERAM, he holds a Doctorate in Economics from Aix-Marseille University, and his areas of expertise include emerging markets and international economics.

• Preface ixAcknowledgments xiForeword by Campbell R. Harvey xiii1 Introduction 11.1 An historical perspective 11.2 Outline of the book 4References 72 An Overview of Country Risk 92.1 A Review of the literature 92.1.1 The terminologies 92.1.2 Definitions of country risk 102.1.3 Sources of risk 132.1.4 Types of investment 132.1.5 The historical context 142.1.6 Different methodologies 152.2 Classification and examples of country risk 162.2.1 Natural disasters 162.2.2 Socio-political risk 172.2.3 Country-specific economic risk 22References 253 The Economic and Financial Foundations of Country Risk Assessment 313.1 Devaluation 323.1.1 Relative price effects: The elasticities approach 323.1.2 Income effects: The absorption approach 333.1.3 Stock adjustments: The monetary approach 383.1.4 Stock adjustments: The portfolio balance approach 413.1.5 Country risk: Ratio analysis 42References 474 Country Risk Assessment Methodologies: The Qualitative, Structural Approach to Country Risk 494.1 Introduction 494.2 Analysis of welfare and social indicators of the development process 514.3 Analysis of the macroeconomic structures of growth 524.4 External indebtedness, liquidity and solvency analysis 574.5 The savings–investment gap and domestic financial intermediation 614.6 Growth, crisis and governance 634.7 The “qualitative” aggregate approach to political risk 694.8 Conclusion 72References 755 Assessment Methodologies: Ratings 795.1 Global country risk ratings 795.1.1 Specialized ranking firms 795.1.2 Export credit agencies 885.1.3 Summary of global country risk ranking methods 905.2 Country credit ratings 935.2.1 Credit rating agencies 945.2.2 Fitch 945.2.3 Moody’s 985.2.4 Standard & Poor’s 1015.2.5 Country rankings published in magazines 1025.2.6 Summary of country credit rating methods 1055.3 Conclusion 109References 1106 Econometric and Mathematical Methods 1156.1 Discriminant analysis 1156.2 Logit and probit models 1176.3 Regression analysis and model building 1186.4 Monte Carlo simulations 1216.5 Value at risk (VaR) 1226.5.1 VaR for a single-asset portfolio 1236.5.2 VaR for a two-asset portfolio 1236.5.3 Other methods for Estimating VaR 1246.6 Principal components analysis 1246.7 Non-linearities and non-parametric estimation 1256.8 Artificial neural networks 1276.9 Multicriteria 127References 1297 Risk Models 1337.1 Credit risk 1337.1.1 Probabilities of default using historical data 1337.1.2 Probabilities of default using interest rate spreads 1337.1.3 Probabilities of default using firm value 1357.1.4 Countrymetrics 1377.1.5 Loss given default 1407.1.6 Credit value at risk 1407.1.7 Credit VaR, default correlation and contagion 1417.2 Investment risk 1427.2.1 Adjusting the expected cash flows 1427.2.2 Adjusting the discount rate 1427.2.3 The Macro CAPM 1447.2.4 Measuring political risk as an insurance premium 145References 1478 International Portfolio Investment Analysis 1498.1 Modern financial theory 1498.2 International portfolio investment and country risk management 1548.2.1 The international portfolio investment panorama 1548.2.2 Impact of country risk on international portfolio investment 1558.2.3 International diversification 1568.2.4 International Capital Asset Pricing Model 1588.3 The Limits of the ICAPM 1598.3.1 The normal distribution 1608.3.2 Portfolio diversification 1618.3.3 The CAPM 1638.3.4 The Bank of America approach 1638.3.5 The Goldman Sachs approach 1648.3.6 The JP Morgan approach 1658.4 Conclusion 165References 1669 Financial Crises in Emerging Market Countries: An Historical Perspective 1719.1 Introduction 1719.2 Historical perspective 1749.2.1 Economic growth-cum-debt process 1749.2.2 Bonds versus loans 1749.2.3 The rising importance of commercial bank lending in the post-WWII era 1759.2.4 The debt crisis and the market-driven menu approach 1769.3 Solving the debt crisis 1779.3.1 Phase I – Buying time with rescheduling 1779.3.2 Phase II – The new money approach 1789.3.3 Phase III – The official concerted approach to debt restructuring 1799.4 Debt reduction instruments 1859.5 The way forward in the early 2000s: Back to the 1890s? 1889.5.1 The return of private capital flows 1889.5.2 The return of bondholders 1899.5.3 The rise in non-debt-creating flows 1909.5.4 The emergence of structured financing 1909.6 Conclusion 191Appendix: The Brady Plan at work in EMCs 192References 19510 Country Risk and Risk Mitigation Instruments 19710.1 Introduction 19710.2 The role of national export credit agencies 19810.3 The role of official multilateral risk guarantee institutions 20110.3.1 The World Bank’s co-financing program 20110.3.2 The role of the International Finance Corporation 20310.3.3 The role of MIGA (Multilateral Investment Guarantee Agency) 20410.4 The risk mitigation role of public and private risk guarantee institutions 20410.5 The role of private providers of specialist insurance for country risk 20510.6 The market-based “menu” approach 20610.6.1 The rise of the London Club debt secondary market of emerging market loans 20810.6.2 Price developments 21110.6.3 Technical supply and demand factors affecting debt prices 21110.6.4 Debt conversion transactions 21210.6.5 Mechanics of debt conversion 21310.6.6 Range of debt conversion transactions 21510.6.7 Official bilateral debt conversion 21710.6.8 Debt conversion: A positive sum game? 218References 22011 Country Risk Assessment: A Matter of Information and Intelligence Gathering 22111.1 Introduction 22111.2 Solvency and liquidity risk: The supply of debt-related information 22311.2.1 Official sources of country risk data and information 22311.2.2 Private sources of country risk data and information 23411.3 FDI-related country risk assessment 23911.3.1 The role of specialized country risk assessment companies 23911.3.2 National public and private information sources 24011.3.3 Think-tanks and risk analysis companies 24111.4 Conclusion 243Appendix: External debt, official information sources 244References 245Glossary 247Index 265

MICHEL HENRY BOUCHET is Professor of Finance at CERAM-Sophia Antipolis (France), Scientific Director of the MSc in International Finance, and Head of the Chair 'Global Finance'. He is also Managing Director of DEFI/Developing Finance, Paris. After an international banking career at BNP, the World Bank and the Washington-based Institute of International Finance, Dr. Bouchet was founder and CEO of Owen Stanley Financial, a specialized advisory firm dealing with debt restructuring strategy for country governments. Dr. Bouchet graduated in Economics from the University of Paris and IEP-Paris. He also holds an M.A. and a Ph.D from USC (Columbia-USA). EPHRAÏM CLARK is Professor of Finance at Middlesex University, London, and Visiting Professor at ESC Lille, France, with extensive teaching experience in Europe and the USA. He is Founding Editor of the European Journal of Finance, Co-editor of Treasury Affairs, and Associate Editor of the International Journal of Finance. Professor Clark is the author of eight books and over 50 articles in academic and professional journals in the field of international risk management, and he also has extensive experience in private business and as a consultant.BERTRAND GROSLAMBERT after working in Africa as Financial Controller with the French oil group, Total, Dr. Groslambert joined Paris-based FP Consult (now part of Fortis Group), an emerging market investment management company with a US$250 million portfolio. He was equity fund manager specializing in Latin American stock markets. Dr. Groslambert teaches International Finance Strategy and International Risk Management at CERAM. A graduate himself from CERAM, he holds a Doctorate in Economics from Aix-Marseille University, and his areas of expertise include emerging markets and international economics.

• Preface ixAcknowledgments xiForeword by Campbell R. Harvey xiii1 Introduction 11.1 An historical perspective 11.2 Outline of the book 4References 72 An Overview of Country Risk 92.1 A Review of the literature 92.1.1 The terminologies 92.1.2 Definitions of country risk 102.1.3 Sources of risk 132.1.4 Types of investment 132.1.5 The historical context 142.1.6 Different methodologies 152.2 Classification and examples of country risk 162.2.1 Natural disasters 162.2.2 Socio-political risk 172.2.3 Country-specific economic risk 22References 253 The Economic and Financial Foundations of Country Risk Assessment 313.1 Devaluation 323.1.1 Relative price effects: The elasticities approach 323.1.2 Income effects: The absorption approach 333.1.3 Stock adjustments: The monetary approach 383.1.4 Stock adjustments: The portfolio balance approach 413.1.5 Country risk: Ratio analysis 42References 474 Country Risk Assessment Methodologies: The Qualitative, Structural Approach to Country Risk 494.1 Introduction 494.2 Analysis of welfare and social indicators of the development process 514.3 Analysis of the macroeconomic structures of growth 524.4 External indebtedness, liquidity and solvency analysis 574.5 The savings–investment gap and domestic financial intermediation 614.6 Growth, crisis and governance 634.7 The “qualitative” aggregate approach to political risk 694.8 Conclusion 72References 755 Assessment Methodologies: Ratings 795.1 Global country risk ratings 795.1.1 Specialized ranking firms 795.1.2 Export credit agencies 885.1.3 Summary of global country risk ranking methods 905.2 Country credit ratings 935.2.1 Credit rating agencies 945.2.2 Fitch 945.2.3 Moody’s 985.2.4 Standard & Poor’s 1015.2.5 Country rankings published in magazines 1025.2.6 Summary of country credit rating methods 1055.3 Conclusion 109References 1106 Econometric and Mathematical Methods 1156.1 Discriminant analysis 1156.2 Logit and probit models 1176.3 Regression analysis and model building 1186.4 Monte Carlo simulations 1216.5 Value at risk (VaR) 1226.5.1 VaR for a single-asset portfolio 1236.5.2 VaR for a two-asset portfolio 1236.5.3 Other methods for Estimating VaR 1246.6 Principal components analysis 1246.7 Non-linearities and non-parametric estimation 1256.8 Artificial neural networks 1276.9 Multicriteria 127References 1297 Risk Models 1337.1 Credit risk 1337.1.1 Probabilities of default using historical data 1337.1.2 Probabilities of default using interest rate spreads 1337.1.3 Probabilities of default using firm value 1357.1.4 Countrymetrics 1377.1.5 Loss given default 1407.1.6 Credit value at risk 1407.1.7 Credit VaR, default correlation and contagion 1417.2 Investment risk 1427.2.1 Adjusting the expected cash flows 1427.2.2 Adjusting the discount rate 1427.2.3 The Macro CAPM 1447.2.4 Measuring political risk as an insurance premium 145References 1478 International Portfolio Investment Analysis 1498.1 Modern financial theory 1498.2 International portfolio investment and country risk management 1548.2.1 The international portfolio investment panorama 1548.2.2 Impact of country risk on international portfolio investment 1558.2.3 International diversification 1568.2.4 International Capital Asset Pricing Model 1588.3 The Limits of the ICAPM 1598.3.1 The normal distribution 1608.3.2 Portfolio diversification 1618.3.3 The CAPM 1638.3.4 The Bank of America approach 1638.3.5 The Goldman Sachs approach 1648.3.6 The JP Morgan approach 1658.4 Conclusion 165References 1669 Financial Crises in Emerging Market Countries: An Historical Perspective 1719.1 Introduction 1719.2 Historical perspective 1749.2.1 Economic growth-cum-debt process 1749.2.2 Bonds versus loans 1749.2.3 The rising importance of commercial bank lending in the post-WWII era 1759.2.4 The debt crisis and the market-driven menu approach 1769.3 Solving the debt crisis 1779.3.1 Phase I – Buying time with rescheduling 1779.3.2 Phase II – The new money approach 1789.3.3 Phase III – The official concerted approach to debt restructuring 1799.4 Debt reduction instruments 1859.5 The way forward in the early 2000s: Back to the 1890s? 1889.5.1 The return of private capital flows 1889.5.2 The return of bondholders 1899.5.3 The rise in non-debt-creating flows 1909.5.4 The emergence of structured financing 1909.6 Conclusion 191Appendix: The Brady Plan at work in EMCs 192References 19510 Country Risk and Risk Mitigation Instruments 19710.1 Introduction 19710.2 The role of national export credit agencies 19810.3 The role of official multilateral risk guarantee institutions 20110.3.1 The World Bank’s co-financing program 20110.3.2 The role of the International Finance Corporation 20310.3.3 The role of MIGA (Multilateral Investment Guarantee Agency) 20410.4 The risk mitigation role of public and private risk guarantee institutions 20410.5 The role of private providers of specialist insurance for country risk 20510.6 The market-based “menu” approach 20610.6.1 The rise of the London Club debt secondary market of emerging market loans 20810.6.2 Price developments 21110.6.3 Technical supply and demand factors affecting debt prices 21110.6.4 Debt conversion transactions 21210.6.5 Mechanics of debt conversion 21310.6.6 Range of debt conversion transactions 21510.6.7 Official bilateral debt conversion 21710.6.8 Debt conversion: A positive sum game? 218References 22011 Country Risk Assessment: A Matter of Information and Intelligence Gathering 22111.1 Introduction 22111.2 Solvency and liquidity risk: The supply of debt-related information 22311.2.1 Official sources of country risk data and information 22311.2.2 Private sources of country risk data and information 23411.3 FDI-related country risk assessment 23911.3.1 The role of specialized country risk assessment companies 23911.3.2 National public and private information sources 24011.3.3 Think-tanks and risk analysis companies 24111.4 Conclusion 243Appendix: External debt, official information sources 244References 245Glossary 247Index 265