Sovereign Environmental Risk

As a result, sovereign risk is now becoming banking risk.

Traditionally, sovereign risk has been concentrated in emerging market economies.

Investors were not worried about default risk on Spanish or Irish sovereign debt, or about Italy s chronically large sovereign debt.

Sharp rises in sovereign, corporate, and interbank liquidity spreads will increase the cost of capital, and increases in risk aversion, volatility, and sovereign risk will undermine business, investor, and consumer confidence further.

The European Commission s claim that this slowdown reflects high sovereign default risk, rather than fiscal consolidation, is belied by the UK, where the sovereign risk is deemed by markets to be virtually nonexistent.

The eurozone s sovereign risk problems could worsen, leading to another round of asset price corrections, global risk aversion, volatility, and financial contagion.

The risk premia on the sovereign debt of Greece, Ireland, and others have not diminished.

We must then break the perverse feedback loop between banking risk and sovereign risk that is at the heart of the euro crisis.

It didn t work. Eurozone sovereign debt turned out not to be homogenous with respect to risk.

But the risk that the world s investors currently are trying to avoid by rushing into US, Japanese, and German sovereign debt is not a fundamental risk.

Even if this sounds unfair, it is logical to expect rating agencies, which had been lax in evaluating credit risk, now to be rigorous in assessing all forms of risk, including sovereign risk.

These steps, it is argued, have taken both sovereign default risk and a banking crisis off the table.

A sovereign default in Europe will never be a mere value to be plugged into some statistical risk model.

NEW YORK Today s swollen fiscal deficits and public debt are fueling concerns about sovereign risk in many advanced economies.

As a result, sovereign risk today is a greater problem in advanced economies than in most emerging market economies.

But sounder fiscal policy might lead to even higher inflows as the country s external balance and sovereign risk outlook improve.

It would be unfortunate if governments requiring financial institutions to be more prudent in managing risk were at the same time asked to turn a blind eye to sovereign risk.

If systemic risk can cause this kind of cascading sequential imbalance, then the sovereign needs to be alert, competent at identifying rising systemic risk, and able to take corrective action early.

The euro s rise will soon cause massive pain to the PIIGS, whose recessions will deepen, causing their sovereign risk to rise.

Sovereign spreads are already pricing the risk of a domino effect from Greece to Spain, Portugal, and other euro zone members.

Finally, sovereign risk is rising consider the troubles faced by investors in Dubai, Greece, and other emerging markets and advanced economies.

The third response is to reduce sovereign risk by establishing a system of surveillance and mutual guarantees between the eurozone countries.

Of course, some believe that the Fed s mass purchases of US debt poses an even bigger risk than Europe s sovereign debt crisis.

NAIROBI Until the global financial crisis erupted four years ago, sovereign bonds had traditionally been viewed as reliable, virtually risk free investments.

With more than 40 trillion of sovereign debt in global markets at any given time, that is a very high risk game.

21. Emphasizes that it is important for sovereign risk assessments made by private sector agencies to be based on objective and transparent parameters

Nevertheless, the crisis should abate somewhat, because the most risk averse institutions have by now sold their holdings of peripheral countries sovereign debt.

Lenders must suffer losses, so that they price sovereign risk more accurately in the future and make reckless governments pay higher interest rates.

Investors subsequent efforts to price in the risk of a eurozone breakup not the volume of sovereign debt caused bond yields to spike.

With bonds of peripheral eurozone nations continuing to fall in value, the risk of Irish, Greek, and Portuguese sovereign defaults is higher than ever.

But the metamorphosis tends to go hand in hand with localized monetary contractions that exacerbate the correlated risk of sovereign default and bank failures.

If the EU wants a monetary union in which sovereign debt is relatively homogenous with respect to risk, fiscal discipline must be similarly homogenous.

But what is proposed now will make lending for investment even less attractive and increase the incentive to concentrate sovereign risk in the banking sector.

The ECB s treatment of all such debt as equally powerful sources of back up liquidity now trumps any analysis of differences in long term sovereign risk.

It is likely that growing natural resource scarcities are driving a paradigm shift, with potentially profound implications for economies and thus for sovereign debt risk worldwide.

Clearly, environmental risks are potentially large enough to affect countries economies in ways that could influence their willingness or ability to repay sovereign debt. In addition, these risks vary widely across countries, including countries whose current credit ratings suggest similar levels of sovereign risk.

But building institutions takes time, which is in dangerously short supply, given the risk of bank runs, sovereign debt crises, and the collapse of the single currency.

Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk.

The eurozone, currently wrestling with fiscal imbalance and sovereign debt risk, has a strong and autonomous central bank, but is fiscally fragmented and only partly unified politically.

This heightened uncertainty could spill over to economic activity in the rest of the European Union through adverse feedback loops between sovereign risk and the banking system.

Another risk implied by a unilateral Palestinian move to statehood is that it might reduce the conflict with Israel to a banal border dispute between sovereign states.

We are all sovereign States, with sovereign rights and responsibilities.

In the face of high systemic risk, private capital is leaving banks and the sovereign debt markets, causing governments borrowing costs to rise and bank capitalization to fall.

In some countries with high levels of debt and impaired growth, fiscal stimulus could raise the risk premium on sovereign debt and be counterproductive others have more flexibility.