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FRM Part II · FRM Exam Part II · Country Risk: Determinants, Measures, and Implications

Which of the following is most likely to increase a sovereign's default risk, other things equal?

A large share of debt maturing within a year raises default risk because the sovereign must refinance quickly. When global liquidity tightens, rollover may be costly or impossible. Longer maturities, higher reserves and a broader tax base all reduce vulnerability.

  1. AA lengthening of the average maturity of its debt
  2. BA rise in foreign exchange reserves relative to short-term external debt
  3. CA broadening of the domestic tax base
  4. DA large share of debt maturing within the next year during a period of tightening global liquidityCorrect

Explanation

Heavy short-term maturities create rollover risk, which is acute when global liquidity tightens and refinancing becomes costly or unavailable. The other choices reduce vulnerability: longer maturity, bigger reserves relative to short-term debt, and a stronger revenue base.

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