Here are some basic country risk definitions for one’s edification.
Country risk: A collection of risks associated with investing in a foreign country.
Political risk: The risk that an investment’s returns could suffer as a result of political changes or instability in a country.
Sovereign risk: The risk that a foreign central bank will alter its foreign-exchange regulations thereby significantly reducing or completely nulling the value of foreign-exchange contracts.
Credit risk: The risk of a government becoming unwilling or unable to meet its loan obligations.
Economic risk: The risk that macroeconomic conditions will affect an investment.
Geostrategic risk: The risk that international events, such as wars or diplomatic initiatives, will damage business or financial interests.
Believe it or not, today’s Greek financial crisis is hardly unique, as sovereign debt crises are fairly common. As a result, the policy prescriptions are fairly straightforward and well known. The bottom line? The crisis will persist unless the debt is partially forgiven. Any other method, such as extending the debt repayment schedule or lowering the interest rate, will merely prolong the nation’s economic misery. Of course, the most effective debt crisis resolutions include strict conditions for debt forgiveness; structural economic reforms such as product and labor market reforms are needed too. But until policy makers implement this tried and true formula for resolving sovereign debt crises, Greece’s economic malaise will continue.
Prime Minister Alexis Tsipras of Greece was quite shrewd when he asked voters to approve or disapprove the bailout terms offered by its international creditors. A unique aspect of Greek political life tilted the odds in favor of the ‘no’ campaign.
The Greek word for ‘no’ is ‘oxi.’ The Greeks celebrate “Oxi” day to celebrate the 1940 decision by their prime minister to resist Mussolini’s efforts to align Greece with the Axis powers. According to Stathis Kalyvas, a Yale political scientist, “The ‘no’ is often identified with patriotism and defiance and national pride.” This tailwind likely pushed the ‘no’ vote to victory.
Tsipras gambled and the resounding success of the ‘no’ vote shows he won this round.