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

Which of the following is typically a source of sovereign default risk that is NOT captured by the government's ability to pay but relates to its willingness to pay?

The political cost-benefit assessment of repudiating debt reflects willingness to pay, because a government may choose not to repay even if able, weighing market access and reputation costs. Reserves, tax revenue and debt maturity relate to capacity to pay.

  1. AThe size of foreign exchange reserves
  2. BThe political cost-benefit assessment of repudiating debt versus the cost of losing market accessCorrect
  3. CThe share of tax revenue in GDP
  4. DThe maturity profile of outstanding debt

Explanation

Willingness to pay reflects political and institutional choices, weighing the benefits of not repaying against costs such as loss of market access and reputation. Reserves, tax revenue and maturity profile are all about capacity to pay. Hence B is the only willingness factor.

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