Theoretical aspects of country risk and sovereign risk

The sovereign risk is an important one, worth taking into consideration in the context in which it may occur mainly in trade. This risk must be taken into account as it describes the case in which a bank operates, the conditions of the banking and interbanking system in which a bank operates, but also the business system. Sovereign and country risk refers to the fact that it may occur under certain circumstances that we call sovereigns against which the bank no longer has any possibility of action. For example, in the foreign trade activity, by using L / C as a guarantee and payment method, serious risk elements arise. Of course, they are eliminated by the fact that the respective partners, but especially the debtor, must open a letter of credit guaranteed by a first-class bank in Europe or elsewhere in the world. The extent to which these conditions are not met and there is not a good coordination of the conduct of international transactions, the emergence of risk elements depends very often on the market conditions existing in the countries in which it occurs. On the other hand, sovereign risk is important to bear in mind when a manager hires the bank he runs, and the client operates with a bank he or she does not know enough, or which may eventually fall under sovereign risk through that it does not meet all the conditions and puts under the risk elements the actual payments.