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What is country risk?

Country risk is reflected in the difference between the interest rate paid by the Chilean government and the interest rate paid by the US Department of the Treasury on bonds issued with the same maturity and conditions.

The higher interest rate means that credit for the Chilean government is costlier because investors suppose that lending it money is riskier than lending money to the US government: they perceive that the country risk is greater and that Chile’s payment capacity is lower; consequently they require a greater return to compensate for this additional risk.

Country risk is measured in basis points, where 100 basis points is equal to one percentage point. The level of country risk sets an interest rate floor, or minimum, at which companies and consumers will be able to borrow money, both domestically and internationally. So the higher the country risk, the higher the interest rates will be for the private sector.

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