Genealogy of Country Risk

It is difficult to determine exactly when the concept of country risk was forged. The expression was used as far back as 1967 by Frederick Dahl – then assistant director of the Division of Examinations at the Board of Governors of the US Federal Reserve System – in a research paper addressing the international operations of American banks.

Frederick Dahl states that “an appraisal of the so-called country risk inherent in any foreign credit is the major distinction between domestic and international lending. Besides assessing the creditworthiness of the individual borrower, the bank has to exercise a judgment on political, economic, and social conditions in the country of the borrower as they are likely to affect foreign exchange availabilities at the time of repayment of the loan.”

It was not until 1975–1977 that the notion of country risk began to permeate the economic literature and media. Between 1970 and 1975, the external public debt of low- and middle-income countries soared by 144%, while the share of that debt financed by Western banks climbed from 7.5% to 25%.

This growing exposure to sovereign debt began to worry the US Office of the Comptroller of the Currency (OCC). By 1977, country risk had become a buzzword among bankers and investors. In its annual report released in June 1977, the Bank for International Settlements explained that “country risks [did] add new dimensions to private banking in many ways”; this international institution added that it was “necessary to appraise a country’s overall economic and political development and to relate the data on the amount and the structure of its external indebtedness to a number of macro-economic figures, such as current and prospective foreign exchange earnings.”

Starting in 1977, however, policy makers and academics offered different definitions of country risk. Confusion spread in the following years and remains to this day. The main reason is that country risk experts do not all monitor the same risks; instead, they focus on those risks that impinge on their own respective institutions or clients.

Read more and find all quoted sources in Country Risk: The Bane of Foreign Investors (by Norbert Gaillard, Springer, July 2020).