measure the ability of the portfolio as a whole to withstand the collapse of any single market. SCRPS are determined by the probability of default which is mainly derived from an economic
analysis of the risk of rescheduling. Other political risks
are also taken into account via the
the assumptions made in the
balance of payments forecasts and the adjustments made to
reflect political uncertainty. PMS exposure controls thus
address political risk in the widest sense ie all political and
economic risks on a market which will potentially affect all
cases in the market concerned. The key point is that political
risks may affect all cases on a market. The rescheduling risk
is the most significant but not the only political risk.
7
The problem is, however, that not all political risks are
the same and the likelihood of a market-wide default will vary
significantly according to the type of risk. For example, cash
contracts, with credit terms under 365 days will normally
escape rescheduling but there are some examples where ECGD has
paid substantial claims, notably on Nigeria. Similarly, local costs payable in local currency do not involve the foreign
exchange risk and are likely to escape rescheduling.
Nevertheless, there is a possibility, albeit much reduced, that
other political events will lead to a default in the payment of
such costs.
8 We have concluded that rather than try and apply a simple
"count/not count" approach to each category of
of exposure it
would be more logical to count everything but to apply a
weighting to reflect the different degrees of risk. This approach would overcome the illogicality of not counting at all
certain risks which clearly are not totally immune from
political risks and the equally undesirable result of counting
at 100% risks which are clearly less vulnerable to political risks than others. The concept of weighting is not
the
Stock Control Review Points are also effectively weighted to
reflect risk as measured by the
the probability of default;
the