Location Based Financial Risk: Country Risk Rankings

Tulip mania of Dutch Golden Age in the early 17th century is considered the first recorded speculative bubble. However, economic incidents and financial speculations weakening a nation’s economy had been happening since as early as ancient times. The Roman emperor Nero was one of the pioneers to debase his empire’s currency by decreasing its silver content in 60 AD, in turn producing an annual inflation of around 1,000%. After so many years these events still follow the same pattern, governments print more money to make paying their debts easier, bubbles grow and burst and people keep doing the same mistakes over and over again. Reinhart and Rogoff described this phenomenon best in their book “This time is different”: “The essence of this time is different is simple. It is rooted in the firmly held belief that financial crises are things happen to other people in other countries and other times. Crises do not happen to us, here and now. We are doing things better, we are smarter, we have learnt from past mistakes (which is not quite true). The old rules of valuation do not apply anymore”. In this paper we will study different types of macroeconomic crises, their causes, and effects to a country’s economy, the aspects they all have in common, their differences, and how they affect one another. In this process we will be heavily relying the historical data on economic and financial events. And finally we will propose a logit model to show a given country’s economic and financial stability, and its level of exposure to the risks of happening any of the above mentioned crises. Our results will be compared to the risk agencies’ ranking scores, and necessary conclusions will be made.