Sovereign Environmental 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.

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

It may also help improve the country's sovereign credit rating.

All countries and policymakers face difficult choices concerning the timing of austerity, perceived sovereign credit risk, growth oriented reforms, and equitable sharing of the costs of restoring growth.

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

The point at which credit risk becomes exchange rate redenomination risk is ambiguous.

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.

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

The United Nations goal with respect to the credit rating would be to convince the credit rating agencies to treat the borrowing as quasi sovereign for credit rating purposes.

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.

Credit risk is best hedged through diversification across uncorrelated credits.

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.

Credit risk in the mortgage market is being assumed by the government, and market risk by the Fed.

But, if more risk builds up through continued expansion of shadow credit, this risk buffer may become inadequate.

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

New investment vehicles, such as sovereign wealth funds and Islamic finance, can contribute financing to credit starved firms.

The time has come for a better understanding of the connection between environmental and natural resource risk and sovereign credit risk. Only then will investors, rating agencies, and governments be able to plan over the medium to long term with the knowledge needed to ensure long term economic growth and stability.

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.

While credit expansion can offset this to some degree, increased production based on credit expansion inevitably leads to large scale financial risk.

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

The obligations of certain organizations, such as the World Bank, are defined as quasi sovereign by the credit ratings agencies.

Indeed, a chain of financial intermediaries now earn fees without bearing the credit 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.

This risk was highlighted by the recent downgrade of Italy s credit rating by Standard Poor s.

In the past, banks kept loans and mortgages on their books, retaining the credit risk.

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

So ill, in fact, that Standard Poor s recently cut its sovereign credit rating the country s second downgrade in less than two years.

They range from subdued bank lending to unusually high risk aversion, and from discredited credit vehicles to the withdrawal of some institutions from credit intermediation altogether.

With the government assuming credit risk, mortgages become as safe as government bonds of comparable maturity.

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.

This would, in its turn, allow banks and other lenders to better assess enterprise risks using modern ICT based techniques for credit risk assessment and credit scoring.

Similarly, positioning the IMF as a general risk insurer by introducing precautionary credit lines above normal access limits would be compatible neither with its mission to provide financial assistance on deliberately non risk adjusted terms nor with the current system of refinancing short term Fund credit through risk free official reserves.

In other words, the Fed will use regulatory instruments to control credit growth, risk taking, and leverage.

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.

While sovereign credit quality has deteriorated virtually across the board, and will most probably continue to do so, the implications for individual countries vary.

Clarifying ultimate responsibility for credit quality and risk would also reduce intermediation costs by eliminating the need to resort to informal channels, such as credit guarantee and trust companies.

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.

In order to address the gap between reality and perception, the United Nations Environment Program Finance Initiative (UNEP FI) and the Global Footprint Network (GFN), together with a number of institutional investors, investment managers, and information providers, have launched E RISC, or Environmental Risk in Sovereign Credit analysis.

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.