4
Let me describe first the logic underlying our judgement about the relative weights. The most important political risk is clearly a general default on external obligations brought about by а shortage of foreign exchange; which in turn causes the country concerned to seek relief through the
through the Paris Club. Thus we consider that all risks which fall under the auspices of the Paris Club should be counted at their full value eg all medium and long term debt, but also short term debt where the period of credit equals or exceeds 365 days. Countries have a strong incentive to keep up to date with debts on shorter credit in order to maintain trade flows for essential imports, but such debts have been rescheduled for some markets and we cannot therefore assume that they would definitely be excluded; equally war and general political upheaval, although on past experience less likely to occur, have to be taken into account. We have therefore judged that foreign currency debts on less than 365 days credit should count at 25% to reflect the possibility of Paris Club rescheduling, as well as upheaval etc; and that other risks such as bonds, local currency obligations, externally secured debts (eg CILC), externally funded debts (eg aid financing) and confiscation risks (plant and aircraft) which would not be caught by the Paris Club should count at 5% reflecting the likelihood of them being affected by a political risk, albeit a much smaller one than the rescheduling
risk.
5
This is a cautious assessment, as can be readily seen from the fact that, under the current system of accounting for political risk exposure (or, to be precise, the system which prevailed before the privatisation), a lot of the short term currency debt insured for the most part under CST policies did not count against exposure controls. Nor did bond risks or confiscation risks; and practice on local costs varied considerably from one market to another. Under the proposed system, all risks would be counted, although not with the same weight.
6
data
How does the proposed system compare with experience? As I touched on above, we do not have which directly
directly supports the weightings, but we considered the indirect evidence as follows:
have
6.1 We have looked at the incidence of shorter term debt being rescheduled relative to medium term debt. This comparison gives us a feel for the likelihood of a country seeking to reschedule its short term debt when it asks for Paris Club relief for medium term. Agreements to reschedule Short Term debt, by number, represent 29% of all reschedulings. Comparing the relative value of total short term debt rescheduled to the total for M/LT debt produces an 10% ratio for short term (S/T reschedulings of £730m compared to M/LT of £7.16bn see Annexes Al
These figures
figures represent all
represent all rescheduled
and A2).
?