Nerea San-Martín-Albizuri

Globalisation and the unpredictability of crisis episodes, An empirical analysis of country risk indexes

The ongoing globalisation process has not put an end to international financial crises. On the contrary, it seems to have contributed to their appearance and to accentuating their degrees of unpredictability. In this context, the main objective of the present study is to establish whether the values of the best-known and most widely used country risk indexes, namely, the Euromoney index and the International Country Risk Group (ICRG), and the values of their representative variables could have forecasted well in advance the crises that took place between 1994 and 2002, a period which is herein termed the ‘globalisation era’. The results show that, although the selected indexes and their representative variables were able to identify certain vulnerabilities, they could not accurately identify the political, economic, and/or financial factors that developed prior to these crisis episodes. / Aunque la actual crisis muestra entre los factores causantes de su desencadenamiento ciertas propiedades unicas, no puede obviarse el hecho de que comparte algunas caracteristicas con las crisis anteriores que se produjeron especialmente a partir de 1994. Y una de estas caracteristicas es la imprevisibilidad. El objetivo del presente trabajo es contrastar si los indices mas conocidos y utilizados (el indice de Euromoney y el ICRG) y las variables mas representativas incluidas en su configuracion fueron capaces de anticipar las crisis que tuvieron lugar entre 1994 y 2002, esto es, las crisis de la “era de la globalizacion”. Los resultados obtenidos son negativos, por lo que se concluye que el valor de los indices y el valor de las variables en ellos contenidas se muestran incapaces de reflejar con suficiente antelacion —a medio plazo— las vulnerabilidades que se desarrollaron previamente al surgimiento de los episodios de crisis.

Crises and unpredictability in developing countries

Abstract Developing countries have suffered most of the financial crises in the context of the process of economic and financial globalisation. Both current and previous crises have revealed that unpredictability is a feature common to all the episodes which occurred during the process of globalisation. Although certain alarms went off, any of those external financial crises were actually predicted by the advanced methods in use for prediction and country risk analysis. Taking into consideration the information above, the aim of this paper is to check the ability to foresee external financial crises in developing countries of both the country risk index published by Euromoney and the Credit Ratings variable included therein. We have focused on the external financial crises that took place between 1992 and 2011, that is, in a full globalisation era. The results are negative. It appears that neither the index nor the sovereign ratings are able to reflect early enough the vulnerabilities that arise previously to the setting off the crisis episodes. This leads us to conclude that the existing models of country risk have limits. Thus, it would necessary to develop new instruments to measure this risk, considering uncertainty as an essential feature of the current economic and financial environment.