Sovereign Risk

Every March we are attacked with new circulars from the Central Bank tweaking the definition of Non Performing Asset (NPA) which seems a minor change to the layman but so complicated to the Bankers and Statutory Auditors that they have to hold Seminars and issue guidance notes to ensure the intention and spirit (sometimes conflicting) are executed. Imagine our surprise when events far away as crossing of 3 seas have such an impact as to feature in the Headlines of all local newspapers. When my son read it, he was curious to compare his college notes on risk and the real world. ‘Dad, for years together, the Bankers considered sovereign risk as low risk. Do you think they will have to re-think the classification in light of the news of today?’ He was referring to the two decade earlier Bankers classification of borrowers either owned by the Government or support by the Government or Loans guaranteed by the Government. Bankers considered these as ‘safe’ until of course some events occurred and no longer was this followed but my son’s text book was not yet updated in this matter. ‘Son, Nigeria and some South American countries had issues of repayment of Bonds and other debts to which the Bankers had wizened up in the last decade of the last century.’ ‘Is the drop of a single alphabet ‘A’ such a big issue?’ he asked. I was tempted to regale him on the well worn cliché of typing a letter without just a single alphabet not working on the machine but decided against boring him. ‘If triple A is perfection then even a single drop means you are imperfect and to add insult to the injury is that these countries are not reaching double A plus from something lower but are being DEMOTED. Demotion is embarrassment to anyone’ I explained my point of view.

‘Hmm…France..’ my son’s muse was aloud. I braced for the impact of his whirring thoughts which always seem to lead anywhere but the expected. Practicably came the first salvo. ‘If this rating drop eventually leads to drop in currency rates then the French Perfumes may get as cheap as the American and we can use them daily like cologne’. ‘I guess so’ I replied meekly not wanting to express ignorance of the perfume snob knowledge or the difference between cologne and perfume in the first place. ‘And you too can have the advantage of hosting parties with the world famous French wine and even uncork a champagne or two without much of a dent in your budget’. He was such a caring son that any father would love to have. Now I took off in his direction. ‘France is also known as the capital of the world for fashion. So, designer clothes will also be more affordable.’ I snickered knowing fully well that the single dress of Rs.1.5 lacs would perhaps cost little less than Rs.1 lac which would still be unaffordable to the middle class of India.

‘The writing was on the wall for more than a century yet all ignored the fate of France’ thus spoke my intelligent son. ‘Pray, what did the scholars of the world ignore that you have noted in your nascent student age?’ I asked. ‘Have you seen French cuisine?’ he asked. ‘One eats not look at the cuisine’ the foodie in me was now insulted. ‘What I mean is that have you seen the size of the food they put on the serving plate?’ he elaborated. Trying to recall a mental picture I did admit him to be right. Plates were of normal size, but the food though artistically laid out was admittedly too small for my palate. I recalled distinctly that it took 3 main courses to fill me up where a single would have sufficed under an Indian meal. ‘So, nearly a century of such small helping was a prediction of France entering the class of poor nations.’ Was the grand conclusion we made at that point. We both recalled the glorious days of Louis XIV and of course Queen Marie Antoinette who hosted parties which were unparalleled the world over. What a come down for this country is what saddened us.

‘What do the Banks do when a loan account turns non-performing?’ asked my son. ‘I think they sell the asset and recover their dues like if you default on payment of your car or house, they auction it off’ I educated him. ‘If it is a company then normally, it is taken over buy another company’ ‘And if a country is NPA….’ he mused. At that moment except for my heartbeat everything screeched to a halt. I just could not think of a reply. ‘Is this the modern way to take-over a country?’ he asked in all innocence. Not a bad chain of thoughts I mused. All that effort in the Second World War taken by Herr Hitler and his troops would have been saved and he would just have taken over the economy overnight and enjoyed sitting in the French sunset sipping French wine instead of the smoky dusty War that he had to endure. ‘If this is modern warfare, all you cyber crime detectors were wrong in predicting that the Cyber War is the modern war’ he reminded me of one of my lectures on Ethical Hacking I had given in the recent past. ‘It could also be a fall out of the currency war when the target was earlier China and the attempts of US failed, so they may have aimed at a softer target now. Ever since the Euro currency was a reality, the US$ felt the heat especially when it began to be valued more than it and all major invoiced out of US were being quoted in Euros.. The Foreign Exchange expert in me erupted. ‘You meant this could be a currency war?’ my son opened wide his eyes.

‘While we had earlier equated sovereign risk as no risk or the lowest of risk, what shall take its pace?’ my son had to ask the impossible to answer question. I could not reply an economic answer though there was a philosophical one that at the end of one’s life, all risks come to an end.

Though the father and son conversation came to end there, I still did not have an answer about the status of ‘Sovereign Risk’. I had to phone my Banker friend who was heading the Risk Management Department of his Bank. He laughed and laughed telling me that no-one uses the term Sovereign Risk anymore. Eurozone was already in the ICU and now the risk was more Zonal than Country. I was still puzzled so I asked who I can ask for a better elaboration.

He answered, ‘Monica Lewinsky knows sovereign risk the best’.