Geopolitical Risk and Sovereign Debt: How do the ICRG Risk Metrics Affect Spreads and Economic Growth?
As the US Treasury market leads a reset higher in borrowing costs – with potentially wide-ranging consequences – the empirical link between geopolitical risk and sovereign is well-known. Our ICRG has been key in fleshing out this relationship.
This interesting study from December 2024 assessed the impact of high levels of political risk (i.e., low ICRG ratings) on the growth rates and sovereign spreads of 46 countries, including high and low political-risk countries, high- and low-debt countries, and emerging and developed economies.
The impact of high levels of political risk is economically large and statistically significant.
A ten-point deterioration in a country’s ICRG rating (i.e., an increase in political risk) is associated with an average annual increase in sovereign spreads of 106 basis points, with more marked impacts for high-debt and high-risk countries. The average reduction in GDP growth with such an increase in political risk is two percentage points.
Have a look: (https://www.bruegel.org/analysis/incorporating-political-risk-analysis-sovereign-debt-sustainability)
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