Sovereign credit risk

Credit rating agencies will take into account the capital, interest, extraneous and procedural defaults, and failures to abide by the terms of bonds or other debt instruments when setting a countries credit rating.

The United States government for example has the Foreign Claims Settlement Commission to help lenders recover debts from sovereigns.

This risk can be mitigated by creditors and stakeholders taking extra precaution when making investments or financial transactions with foreign countries.

Frenkel, Karmann, Raahish and Scholtens also argue that the likelihood of rescheduling decreases as investment ratio increases, due to resultant economic productivity gains.

However, Saunders argues that debt rescheduling can become more likely if the investment ratio rises as the foreign country could become less dependent on its external creditors and so be less concerned about receiving credit from these countries/investors.