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FINS5530_Financial Institution Management_2006 Semester 2_Week10_Chap016.pdf

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FINS5530_Financial Institution Management_2006 Semester 2_Week10_Chap016

Sovereign Risk Chapter 16 ? 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.K. R. Stanton McGraw-Hill/Irwin 16-2 ? 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Introduction In 1970s: Expansion of loans to Eastern bloc, Latin America and other LDCs. Beginning of 1980s: Poland and Eastern bloc repayment problems. Debt moratoria announced by Brazil and Mexico. Increased loan loss reserves Citicorp set aside additional $3 billion in reserves for example McGraw-Hill/Irwin 16-3 ? 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Introduction (continued) Late 1980s and early 1990s: Expanding investments in emerging markets. Peso devaluation and subsequent restructuring U.S. loan guarantees under Clinton Administration More recently: Asian and Russian crises. Multiyear restructuring agreements (MYRAs) Brady Bonds McGraw-Hill/Irwin 16-4 ? 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Were Lessons Learned? U.S. FIs limited exposure to in Asia during mid and late 1990s Not all: Chase Manhattan Corp. emerging market losses $150 million to $200 million range Poor earnings by J.P. Morgan. Losses in Russia with payoffs of 5 cents on the dollar McGraw-Hill/Irwin 16-5 ? 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Credit Risk versus Sovereign Risk Governments can impose restrictions on debt repayments to outside creditors. Loan may be forced into default even though borrower had a strong credit rating at origination of loan. Legal remedies are very limited. Need to assess credit quality and sovereign risk McGraw-Hill/Irwin 16-6 ? 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Sovereign Risk Debt repudiation Since WW II, only China, Cuba and North Korea have repudiated debt. Recent steps to forgive debts of most severe cases conditional on reforms targeted to improve poverty problems Rescheduling Most common form of sovereign risk. South Korea, 1998 Argentina McGraw-Hill/Irwin 16-7 ? 2006 The McGra