Euromoney Country Risk Euromoney Country Risk Survey | Page 2

Country Risk:

New Citi research uses Euromoney ratings to identify
sovereign default risk and relative asset value

Citi Research has released a detailed report combining its own econometric model with the output from
Euromoney’s Country Risk Survey to yield a new, more powerful tool for identifying default probabilities
and relative value for sovereign issuers.
The combined approach overcomes many of the shortcomings associated with applying other, previously
published, model-based strategies to sovereigns, and is a novel means for incorporating the crowd-sourcing
consensus technique embodied in the ECR approach in such a practical and comprehensive returns-seeking
environment.
The Euromoney survey regularly asks more than 400 experts worldwide for their assessments of sovereign risk
spanning 186 countries based on 15 political, economic and structural risk factors and other qualitative inputs.
Although domiciled worldwide, ECR experts are not confined to the financial sector, but spread among finance,
industry, government and academia to prevent any biasing of the results.

Incorporating the survey data into Citi’s ‘Hybrid probability of default model’ – a structural-statistical concept
developed by Citi to estimate corporate default probabilities – confirms that ECR score trends lead upgrades
and downgrades in sovereign credit ratings, much as regular users of the ECR survey believed and other
evaluative studies had suggested.
By also mapping credit default swap spreads to ECR scores, additionally Euromoney’s survey is useful for
pinpointing ‘rich’ and ‘cheap’ CDS trades prior to their convergence with fair value.
Both of these findings suggest a powerful portfolio investment strategy tool for marrying risk and return, enabling
portfolio losses, credit momentum and potential asset value to be measured more accurately across countries
on a daily basis.

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