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The 2012 guide to
GLOBAL RISK TRENDS
THE CORPORATE TREASURERS’ GUIDE
> Tectonic shift in global risk
> Eurozone bank stability remains key focus
> Falling Brics
> The new frontiers
September 2012

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The 2012 guide to
GLOBAL RISK TRENDS

The 2012 guide to Global Risk Trends
CONTENTS
> Navigating the new risk landscape 4
> Tectonic shift in global risk 6
> Eurozone bank stability remains key focus 8
> SEPA - The clock is ticking 12
> The disease is spreading 15
> Falling Brics 18
> The new frontiers 21
This guide is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute
for detailed local knowledge.
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Editor: Philip Ayers
Printed in the United Kingdom by: Wyndeham, Roche, UK
© Euromoney Trading London 2012. Euromoney is registered as a trademark in the United States and the United Kingdom.

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The 2012 guide to
GLOBAL RISK TRENDS
Navigating the new risk
landscape
The world is becoming an increasingly risky place to do
business. Corporates must adapt to a new risk paradigm,
with a greater range of risks to mitigate than ever before.
To avoid pitfalls, expertise and a broader understanding
of global risk are required. Michael Spiegel, Head of Trade
Finance and Cash Management Corporates, Deutsche Bank
Since 2008, the overall risk
environment for corporates has
been transformed by waves of
financial, economic and liquidity
crises that has swept through many
developed economies. As we approach the
end of the year, there are few who think
that 2013 will be any easier. The slowdown
across the emerging markets appears
to be gathering pace, while geopolitical
uncertainties persist in many of the
world’s regions.
Businesses must identify the key risks
to which they are exposed if they are to
navigate such troubled waters successfully.
At Deutsche Bank, we identify four key risk
trends facing our clients in 2013.
We take time to get a
deeper understanding of
the client, its processes and
its internal challenges and
targets, to see how we can
add value to its operations”
Firstly, as corporate default rates
begin to increase, so companies face
increased commercial counterparty risk.
Correspondingly, there is an increasing need
to hedge that counterparty default risk.
Next, clients also face counterparty
risk relating to financial institutions.
Managing their concentration risk has
become all important, with far more
attention paid to the credit quality of
each individual counterparty. The times
are over when corporates were willing to
deal with one bank only.
Thirdly, geopolitical risk now plays a
bigger part in our clients’ thinking. As
a result, we see an increase in hedging
against country risk, and a greater focus
on geopolitical strategy.
Fourthly, many suppliers and distributors
are experiencing a continuing liquidity
shortage. As a result, mitigating supply
chain risk is a growing theme for our
clients. This often means companies must
look beyond the risks to their own legal
entity and consider the totality of the
supply chain.

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GLOBAL RISK TRENDS
5
In short, firms must identify all the
different risk pockets in their organization,
including the broader enterprise risk
outside their own legal entity. Then,
they must determine a suitable strategy
to mitigate these risks. They will face
decisions over where to pool their cash,
how best to hedge their positions, how
to get their chosen banks involved and
whether to use private risk insurers.
Finally, when evaluating a potential
banking partner, in addition to evaluating
credit and jurisdictional issues, clients
must ask themselves a further question: Is
the prospective partner committed to the
business for the long term? Does it have
the critical mass to stay in the business
for 10 years? Can it manage the business
successfully, and is it willing to invest in
already-excellent technology and services
for a sustained period?
The pace of globalization means that
companies now have counterparties in
more countries than ever, in addition to
foreign subsidiaries and joint ventures.
We continue to support our clients,
bringing them expertise with in-country
client implementation and service through
our network of offices around the world.
Our solutions-based approach uses
superior technology and state-of-the-art
products that help our clients stay abreast
of continuing developments. With the
needs of the client at the heart of our
business, we will continue to invest and
expand to meet the challenging global
business environment.
Focusing on clients’ needs
At Deutsche Bank, our superior approach
to cash management and treasury services
starts with our focus on the needs of
the clients. We take time to get a deeper
understanding of the client, its processes
and its internal challenges and targets, to
see how we can add value to its operations,
rather than simply turning up with a basket
of products in which we have an edge.
We pride ourselves on our state-of-the-art
technology solutions. We utilize the close
links with colleagues in our award-winning
sales or trading teams to provide hedging
and FX strategies tailored to the needs of
our clients. We also provide liquidity not
only by making use of our balance sheet
and sharing the risk with other banks,
but also looking for innovative solutions,
broadening the investor base over time.

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The 2012 guide to
GLOBAL RISK TRENDS
Tectonic shift in global risk
Global risk patterns have altered substantially in recent
decades. Whereas once Europe offered comparative safety
for treasury operations, today the eurozone crisis has
accentuated the risks associated with cash management
and supply finance. But while the debt crisis is deepening
and infecting other parts of the world, according to
Euromoney’s Country Risk Survey, it is not the only factor
destabilizing the global outlook
The world has changed. That
much is certain. Some 20 years
ago Japan was considered the
safest sovereign, according to
Euromoney’s Country Risk Survey, with
a rock-solid score of 99.4 out of a possible
100 points. Today, Japan doesn’t even make
the top 20. Instead it can be found nestling
between Slovakia and South Korea at 24
in ECR’s global rankings, weighed down
by concerns about its economy, public
finances and government stability. Two
decades ago, Spain was exhibiting fewer
of the problems that have made it such a
The World's "Safest" Sovereigns
The Leaders Overall Global …and 20 Overall
Today… ECR Score Rank Years Ago ECR Score
Norway 90.4 1 Japan 99.4
Switzerland 88.8 2 United States 99.1
Singapore 88.0 3 Switzerland 99.0
Luxembourg 87.9 4 France 98.5
Sweden 86.8 5 Netherlands 98.2
Finland 84.3 6 Austria 97.9
Canada 84.3 7 Germany 97.9
Denmark 83.5 8 United Kingdom 97.8
Netherlands 83.1 9 Canada 97.8
Germany 82.2 10 Belgium 96.9
Hong Kong 82.2 11 Luxembourg 95.8
Australia 81.6 12 Denmark 95.2
New Zealand 80.7 13 Norway 94.7
Austria 79.8 14 Singapore 92.5
United States 75.7 15 Australia 92.5
Chile 74.9 16 Sweden 92.5
Taiwan 74.7 17 Spain 91.2
United Kingdom 74.2 18 Finland 91.2
France 73.9 19 New Zealand 91.1
Qatar 73.1 20 Ireland 90.5
Source: Euromoney Country Risk

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high-risk sovereign today, indistinguishable
from Finland on a score of 91.2. Ireland,
ranking 20th when the survey began (but
now down to 48th), and Italy, bubbling
just below the surface in 24th position
(currently 41st), were also considered much
safer sovereigns for global treasurers. In
fact, all of the top-ranking ECR countries in
1992 now have reduced scores. The world
has indeed become a riskier place.
Even in 1999, when the euro project reshaped
Europe’s boundaries, exactly half of
the top 20 safest sovereigns in the world
were eagerly awaiting conversion to the
single currency. With banking systems
superficially secure, the distress seen
today seemed a distant prospect. Eurozone
participants had, after all, signed up to
macroeconomic stability, dispensing with
their mostly-depreciating currencies, high
inflation and weak, uncompetitive growth
rates, by locking in to Germany’s strong
economy and pocketing the ‘insurance
policy’ offered by the ECB’s pooled reserves
and apparently strict membership rules.
Or so it seemed. Today, only six countries
out of an expanded 17-nation euro currency
area are among the world’s top 20 ‘safest’.
And with France slipping to 19th in ECR’s
rankings this year, it may not be too long
before there are just five.
As the risks surrounding Europe’s debt
problems mount, so the rest of the world is
also becoming less safe – a worrying sign for
treasury managers. Virtually all of the other
main regions/economic groups have become
riskier so far this year, led by the emerging
powerhouses (the BRICs), Central and
Eastern Europe and the Middle East. But
it’s a pattern that cannot be explained by
contagion alone, even if Europe’s problems
have invariably led ECR’s survey contributors
to reassess the risk outlook as exports and
capital flows are affected. A combination
of economic, political and structural factors
is to blame. They range from bank stability
risk, transfer risk (the risk of government
non-payment/non-repatriation), currency
stability risk and the risks associated with
the regulatory and policy environment to
political factors, concerning institutions
and government stability, all of which have
particular relevance to corporate treasury
decision-making.
More than 400 economists and country
risk experts from a range of financial and
other institutions take part in Euromoney’s
Country Risk Survey. They evaluate the
risks faced by international investors in
186 markets worldwide, scoring countries
across a range of political, economic and
structural risk criteria. The ECR survey
combines these contributor assessments
on 15 of the most important risk factors
with other data regarding access to capital,
credit ratings and debt, to formulate an
overall score out of 100 (where 100 is
the least risky and zero the most). The
survey has been undertaken since late
1992 and is updated daily on a ‘real-time’
basis, with scores collated and aggregated
each quarter for comparison purposes.
It can therefore provide an early warning
indicator of emerging risks, distinct from
the sovereign credit ratings supplied by
the various ratings agencies. Further
information on the survey is available from:
www.euromoneycountryrisk.com.
“ As the risks surrounding Europe’s
debt problems mount, so the
rest of the world is also becoming
less safe – a worrying sign for
treasury managers

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The 2012 guide to
GLOBAL RISK TRENDS
Eurozone bank stability
remains key focus
Far from stabilizing, the risks associated with the eurozone
debt crisis are still rising and infecting other parts of the world,
as banking sector problems deepen and extend their reach
Bank stability has become an
increasingly dominant factor
for counterparties and deposit
holders seeking safety. Each of
ECR’s country experts is asked to quantify
bank stability risk, by awarding a score
ranging from 10, typifying a perfectly
functioning system where all possible
exposures are comfortably covered, to
zero, where a systemic breakdown in the
banking system has occurred.
Interestingly, bank stability and
government debt appear to go hand in
hand. High scores are correlated with low
levels of debt and vice versa, with some
exceptions. Finland, Luxembourg and
Slovakia, the three countries with the
highest bank stability scores, have low
levels of debt (below the EU’s 60% of GDP
limit). Greece, Ireland, Portugal and Italy,
those eurozone sovereigns with the lowest
bank stability scores, all have triple-digit
public debt ratios.
The correlation is similar for bank
stability and another of ECR’s surveyed
indicators, government finances. A
higher bank stability score is generally
linked to a higher score for government
finances, while the opposite is also true.
This link between sovereign debt and
bank stability is explained in an article
by Michael Davies and Tim Ng, ‘The rise
Eurostat
180
160
140
120
100
80
60
40
20
0
General Government Debt, % of GDP (y-axis)
vs ECR Bank Stability Scores (x-axis)
Source: Euromoney Country Risk; Eurostat
0 1 2 3 4 5 6 7 8 9 10

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of sovereign credit risk: implications
for financial stability’, in the December
2011 Bank for International Settlements
(BIS) Quarterly Review. The authors
describe how “deterioration in sovereign
creditworthiness drives up banks’ funding
costs and impairs their market access.
Moreover, due to the extensive role of
government securities in the financial
system, banks cannot fully insulate
themselves from higher sovereign risk by
changing their operations.”
With Spain acknowledging it will require
a €100 billion bank bail-out, Italy also
edging toward default, and wider fears over
sovereign debt dynamics as many countries
fail to find the recipe for economic growth,
the health of the region’s financial
system continues to cause alarm. All 17
eurozone sovereigns have succumbed
to increased bank stability risk this year,
perpetuating the trend decline. There is
nonetheless considerable variation among
member states. Spain’s bank stability
10
9
8
7
6
5
4
3
2
1
0
ECR Government Finances Scores (y-axis) vs
Bank Stability Scores (x-axis)
Source: Euromoney Country Risk
0 1 2 3 4 5 6 7 8 9 10
Davies and Ng further explain how
deterioration in a ‘home sovereign’ credit
rating - the country in which a bank is
headquartered – is revealed in a rise in
the banks’ credit default spreads (the
cost of insuring against a debt default),
a fall in short-term debt issuance and
a drain on deposits. Four channels
are identified by which sovereign risk
affects banks’ funding: losses on
sovereign holdings, lower collateral
values for wholesale and central bank
funding, reduced funding benefits from
government guarantees and depressed
credit ratings.
score has fallen aggressively, of course,
and it is now the third riskiest banking
system in the region behind Greece and
Ireland. There have also been large falls in
bank stability scores for other eurozone
participants. An erosion of confidence in
the banking systems in Luxembourg and
the Netherlands is particularly noteworthy.
However, both countries can still boast
high scores in comparison with other parts
of the eurozone - especially Luxembourg,
which is considered to have the safest
banking system bar rock-solid Finland, an
indication that it still offers considerable
security for counterparties and deposit-

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The 2012 guide to
GLOBAL RISK TRENDS
holders. By contrast, ECR’s survey is
pinpointing more worrying trends for
Slovenia and France.
Slovenia, considered safer than Cyprus or
Belgium in January, has suffered from an
alarming decline in its bank stability score
over the past six months, making it the
next ‘at risk’ eurozone sovereign. Two years
ago the Slovenian banking system was
regarded as the third safest in the region
– just behind Finland and Luxembourg.
The state-owned Nova Ljublanska Banka
– Slovenia’s largest bank – is believed to
require a cash injection of €500 million by
the end of this year. The second and third
largest – Nova KBM (also state-owned)
and Abanka Vipa (partially so) – require
€150 million in total to cover their loan
losses. This comes at a time of extreme
economic weakness and pressure on the
government’s finances.
Ales Pustovrh, managing director at
Bogatin, an academic think-tank in
Slovenia, and one of ECR’s contributors,
states: “Slovenian banks do not have any
direct contagion risk to Italy. The banks
are still making profits, and in theory
they could of course increase their capital
through profit, but this would be over
the long term. So there is a likelihood of
a rescue of a few large domestic banks
owned by the government.
“The riskiest exposures involve two groups
of loans: 1. real estate development
companies and construction companies;
2. financial holdings, used as a vehicle to
perform leverage for the country in 2007,”
says Pustovrh.
France drops sharply
But the problems in Slovenia pale into
insignificance in comparison to France.
After Slovenia and Spain, the French bank
stability score is one of the largest fallers
since January. Although Cyprus and Belgium
may be considered riskier from a bank
stability perspective, the trend decline for
France highlights another worrying feature
of the eurozone crisis – French exposure
to Italy and Spain. The latest, end-March,
preliminary consolidated banking statistics
from the BIS indicate that France has the
largest proportion of short-term bank
lending (of up to one-year maturity),
comprising almost 60% of its total bank
claims. The French banking system is also
the most exposed to other banking sectors.
Nearly 61% of its bank lending is to other
banks, which is by far the largest proportion
of any eurozone country.
Bank Exposures to "At-Risk" Countries (% of total foreign claims)
Exposure to > UK France Neths Italy Spain Belgium Greece average
France 17 0 15 46 20 50 51 28
Germany 18 19 20 18 24 6 8 16
UK 0 23 24 8 15 4 11 12
US 15 18 13 5 7 4 5 10
Japan 6 10 6 4 4 3 1 5
Switzerland 11 6 5 3 3 2 3 5
Spain 3 4 2 5 0 1 1 2
Italy 3 3 2 0 5 1 1 2
Belgium 2 3 3 2 2 0 0 2
Source: Bank for International Settlements

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Moreover, France is acutely exposed to
Italy and, to a lesser degree, Spain. French
claims on Italy, amounting to 46% of that
country’s total foreign claims, comprise 29%
of all bank lending and 55% of all non-bank
private-sector lending to Italy, making
France hugely implicated in any potential
Italian crisis. The figures are compiled on
an ‘ultimate risk’ basis, taking into account
where the claims are underwritten (the
risk source), rather than just the source of
the bank actually doing the lending – an
important distinction. France is also more
exposed to Belgium and Greece than other
major sovereigns. No wonder that French
banks are rapidly scrambling to unwind their
foreign exposures, while other banks are in
turn lessening their risk exposures to France.
The data contrast with the picture of
relative serenity portrayed by credit default
swap (CDS) spreads for the major French
operators, with the exception of Dexia,
the joint French/Belgian owned operator,
which also trades in Luxembourg. Badly
affected by the 2008 crisis, and requiring
a €6 billion bailout, it is still regarded as an
exception. Yet, according to data supplied
by Markit, the financial information
services company, CDS spreads for other
large French banks, ranging from 233
basis points to 283bp, are not only similar
to large US banks - Bank of America,
Citigroup and Goldman Sachs, which range
between 242 and 259bp - but, for BNP
and SocGen, have also tightened since
January. This may reflect the reduced
lending abroad as the banks attempt
to preserve capital and minimize their
foreign exposures, but is probably also an
over-enthusiastic response to eurozone
recovery plans.
As Victoire de Groote, global head of
country risk at HSBC, and one of ECR’s
French contributors, states: “Italy is the
main risk to French banks and BNP is the
most exposed French bank to Italy. It is very
difficult for French banks to raise capital
in the case of an Italian bailout. In a worst
case scenario French banks would need to
be assisted by the ESM fund. The sovereign
would not be able to manage the scale of
the banking sector alone.”
“ With Spain acknowledging
it will require a €100 billion
bank bail-out, Italy also edging
toward default, and wider fears
over sovereign debt dynamics
as many countries fail to find
the recipe for economic growth,
the health of the region’s
financial system continues to
cause alarm

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SEPA - The clock is ticking
The announcement of the end-date for compliance with
the SEPA credit transfer and direct debit has removed any
remaining doubt that the initiative will come to fruition.
Karsten Becker, Deutsche Bank’s senior product manager for
corporate payables and receivables, discusses how corporates
can meet the compulsory – and looming – deadline
The SEPA (Single Euro Payments
Area) debate has traditionally
divided the market into two
camps: the sceptics, on one side,
and those who have bought into the reality
of a unified European payments landscape
on the other. The declaration of 1 February
2014 as the compliance deadline for
migration to the SEPA Credit Transfer (SCT)
and SEPA Direct Debit (SDD) has proved
the believers right – and has changed the
nature of the SEPA debate.
Corporates, rather than debating if they
should prepare for SEPA, understand
that the time to act is now and are
deliberating how to meet the deadline in
the face of ongoing market turbulence
and growing cost concerns. As the scale
As the scale of the challenges
associated with SEPA
compliance begins to hit
home, many companies realize
they will struggle to plan
and execute such a complex
task without the support of
a capable and knowledgeable
banking partner”
of the challenges associated with SEPA
compliance begins to hit home, many
companies realize they will struggle to
plan and execute such a complex task
without the support of a capable and
knowledgeable banking partner.
Strategic and tactical challenges
The challenges associated with migration to
the SCT and SDD schemes are significant.
Companies must make strategic, highlevel
decisions that can also affect their
businesses outside the scope of SEPA, and
address tactical steps directly related to
compliance. As a result, corporates are wise
to engage their partner bank(s) as early
as possible in the migration process. This
can ensure that corporates not only fulfil
the SEPA requirements (the SEPA ‘must’),
but also analyze how to go beyond pure
compliance and unlock the true potential
that SEPA offers (the SEPA ‘could’).
This potential comes from the fact that
SEPA is a driver for the centralization
of the payments function – or even the
establishment of centralized payables/
receivables processing centres in the case
of larger companies. This can enhance the
benefits of SEPA by leading to greater
cost-savings and efficiency gains, as

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GLOBAL RISK TRENDS
13
well as increasing visibility with respect
to liquidity management and funding
requirements. Notwithstanding, corporates
must ensure that they do not risk delaying
their mandatory SEPA migration project
due to any such centralization initiative. If
both can be achieved in parallel and prior
to the end date, then this would of course
combine the best of both worlds (SEPA
‘must’ and SEPA ‘could’). If in doubt, we
recommend tackling the strategic issue of
centralizing payments and/or collections
only in a second phase and after the
tactical steps for migration to SEPA have
been completed successfully.
Looking at these tactical SEPA migration
steps, just to pick one example, formatting
is certainly a key aspect of SEPA compliance.
XML is the required format for SEPA
transactions – and is also set to become the
future format for non-SEPA transactions.
Corporates have two options regarding XML
implementation. They can either implement
XML capabilities themselves, or rely on
conversion services offered by a number of
specialist vendors or even banks. Neither
option is without challenges.
Third-party conversion services (based
on a variable ‘pay-as-you-go’ model, for
example) can be less expensive in the
short term, but they may not be the most
cost-effective long-term strategy. In-house
generation of XML, on the other hand,
can have a significant upfront impact
on enterprise resource-planning (ERP)
and connectivity systems (XML files are
generally larger than their domestic and
global equivalents), but are likely to be
less expensive in the long run. In any case,
a detailed consultative process should be
undertaken before any decision is made
in this respect. Not only can this avoid
costly mistakes, but also ensure that the
process is well-timed and managed – both
internally and externally via ERP or thirdparty
providers.
Meeting the deadline
Such complexities, of course, provide
only an overview of SEPA’s intricacies.
Further examples include the gathering of
permissible account identifiers for SEPA
transactions and managing obligatory
changes to payment detail fields.
Overcoming these challenges, and more,
is not possible without expert guidance
and value-added services by banks, with
Deutsche Bank recognized by leading
European corporates – and indeed the
market as a whole – as a principal provider
of both.
Such recognition stems from our active
involvement in SEPA’s development –
including participation in regulatory debates
and driving technology innovation – and
our ongoing commitment to promoting
corporate interests across the banking
industry as the initiative evolves. To aid
corporate migration to SEPA, we have
developed what we call a ‘four-pillar’
implementation strategy that aims to
provide immediate financial benefits, dataformat
flexibility, bank-account flexibility
and access to value-added services
designed to maximize the benefits of the
initiative. This level of flexibility – combined
with ongoing investment in an automated,
scalable SEPA engine to deal with increasing
payment flows – reflects the bank’s belief
in the initiative’s importance. It is also
evidence of our pledge to be the trusted
partner bank of choice for SEPA compliance.
However, our commitment does not stop
there. We believe that our payments
expertise also perfectly positions us to help
clients unlock SEPA’s true potential and
support their centralization journey.

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GLOBAL RISK TRENDS
ExECUTIvE SUMMARy: THE SEPA
jOURNEy SO FAR
SEPA is a politically driven European payments harmonization initiative
designed to turn fragmented national markets into a borderless-payments
zone in which there are no differences between national and intra-European
euro payments.
SEPA consists of 32 countries – all 27 EU member states (including 10 noneuro
countries), the remaining countries of the European Economic Area
(EEA), and Switzerland and Monaco.
KEy DATES
> 1999: Introduction of the euro
> 2000: EU’s Financial Services Action Plan to create a single market for
financial services (included the demand for a single payments market)
> 2002: Launch of the SEPA initiative by the European banking sector
> 2008: Launch of the SEPA credit transfer
> 2009: Launch of SEPA direct debit
> 2014: February 1, deadline for mandatory migration to SEPA credit transfer
and SEPA direct debit
ExECUTIvE SUMMARy: SEPA CREDIT
TRANSFER AND SEPA DIRECT DEBIT
Corporates must be using the SEPA Credit Transfer (SCT) and SEPA Direct
Debit (SDD), instead of existing non-urgent mass credit transfers and direct
debits, by February 1, 2014.
SCT enables payment service providers to offer a basic credit transfer service
in euro throughout the eurozone whether for single or bulk payments.
Users benefit in terms of functionality, cost effectiveness, ease of use and
processing efficiency.

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15
The disease is spreading
The failure of European leaders to stem the debt crisis is
contributing to uncertainty, not only across the eurozone,
but also in parts of central and eastern Europe and Latin
America, where parent banks dominate the local financial
scene. But, as Hungary and Argentina both illustrate, the rise
in risk cannot be explained by bank stability indicators alone
In the light of a possible break-up
of the eurozone, ECR’s contributors
have begun to question the relative
strengths of central and eastern
Europe, to such an extent that the region
appears to be on a convergence path with
Latin America, which had hitherto been
considered a more risky alternative for
corporate treasurers seeking safety. The
eurozone debt crisis is invariably a big part
of the story. The robustness of banking
systems in some of the CEE region’s larger
sovereigns – Ukraine, Hungary, Turkey
etc – continues to be questioned, against
the backdrop of weakening economies,
the disintegration of cross-border ties
fuelled by the crisis and interbank lending
constraints.
Supported by the liquidity boost from the
ECB’s long-term refinancing operations (low
interest rate funding to eurozone banks),
there doesn’t appear to be any major credit
crunch taking place, and fears of a mass
withdrawal of parent banks from the CEE
region have so far proved unfounded.
Still, falling ECR scores highlight how the
Greek crisis is making Cyprus and some
of the Balkan states more vulnerable,
and how spillovers from the eurozone
may complicate treasury management.
Operational risks must also be factored in,
as bank guarantees may prove invalid, and
bank accounts could be frozen or closed
entirely, if the crisis spins out of control
- a worst-case scenario, perhaps, but one
which is worthy of attention.
Yet the situation is far from uniform.
Some countries are standing tall against
the attenuation of risk. Bulgaria, Romania
and Lithuania haven’t seen any further
deterioration in their ECR scores this year,
and the Czech Republic is still the safest
CEE sovereign, ranking 22 on ECR’s global
scale – with its banks considered stronger
than any eurozone members, bar Finland
and Luxembourg. As the Financial Times
recently reported, the Czech Republic’s
average non-performing loan ratio is very
low at 5.9% (according to central bank
data), compared to 16.3% for Romania
and 20.4% for Serbia. And foreign currency
“ … a potential shake-out of the
Latin American banking sector,
as stronger regional lenders
attempt to gain market share
from Spanish and Portuguese
banks divesting assets

16
The 2012 guide to
GLOBAL RISK TRENDS
lending comprises just 14.8% of total
loans. Czech banks are renowned for their
conservatism –the fact that Komercni
Banka has been harmed by a write-down
on its Greek and Portuguese bond holdings
has certainly raised a few eyebrows.
System-wide, though, there is strong
liquidity and low sovereign debt, offering a
relative haven for fleeing depositors.
Hungary’s challenges
By contrast, Hungary - rated BB+ by Fitch
and S&P; Ba1 by Moody’s - is by far the
worst performer in the region, having
plunged 10 places in ECR’s global rankings
since January, to 67th. The country has
slipped below 12 other sovereigns, including
not only Croatia, Bulgaria and Portugal,
but also India, Russia and Indonesia.
ECR contributors have responded to the
government’s stalling programme of
fiscal consolidation – complicated by a
weak economy, currency depreciation and
a delayed agreement with multilateral
lenders – by downgrading Hungary across
10 of the survey’s 15 indicators. The score
for bank stability has naturally plummeted
– the banking system is burdened by rising
household debts (in foreign currency) and
corporate bankruptcies, and a property
market slump is eroding loan quality.
According to Moody’s, Hungary has the
most miserable loan-to-deposit ratios
among the CEE-6 countries (a group that
also includes the Czech Republic, Poland,
Romania, Slovakia and Slovenia).
But lower scores for a range of political
factors, including information access/
transparency, institutional risk, the
regulatory and policy environment, and
government stability, are also flashing on
the radar for treasury managers, not to
mention increased currency risk. Ukraine
may still have the highest monetary policy/
currency stability risk across the region, as
BCA Research reflects on in a special report
(‘The Ukraine: An Unsustainable Currency
Peg’): “The Ukraine is on the precipice of
another bout of major financial distress.
The country’s deteriorating balance-ofpayment
dynamics, coupled with the
global growth slowdown, have made
maintaining its currency peg to the US
dollar unsustainable.” Yet currency risk is
also a major problem for Hungary.
ECR monetary policy/currency stability scores
Source: Euromoney Country Risk
10
9
8
7
6
5
4
3
2
1
0
Sep-'10
Jan-'12
Jun-'12
Czech Rep.
Bulgaria
Poland
Turkey
Croatia
Greece
Romania
Hungary
Ukraine

The 2012 guide to
GLOBAL RISK TRENDS
17
Hungary’s CDS spreads – measuring the
cost of insuring against default - were
trading at 468 basis points at the end
of July, not far off the levels seen in Italy
(489bp), according to data provided by
Markit, the financial information services
company. Hungary has also slipped
down the World Bank’s Doing Business
rankings, due to tighter credit access and
a costlier company tax environment, and
its short-term economic outlook is bleak
- something that ECR contributors have
been aware of for some time as the scores
for the economic-GNP outlook indicator
have fallen. With industrial production
plummeting and business confidence
deteriorating, a 1% contraction in Hungary’s
real GDP is forecast for 2012, according to
the European Bank for Reconstruction
and Development (a 1.5% drop, says the
Organization for Economic Cooperation and
Development).
Hungary’s darkening outlook is summed up
by the International Monetary Fund’s latest
warning, following a staff visit in July: “The
Hungarian economy continues to face a
series of interconnected challenges related
to high public and external indebtedness,
strained bank balance sheets, weak
confidence, and elevated risk perceptions.
Amid a difficult external and domestic
environment, real GDP is expected to
contract in 2012 and recover modestly in
2013. Beyond the current cycle, historically
low levels of private investment and labour
participation cloud the growth outlook.”
Latin worries
And Latin America hasn’t escaped the
global risk aversion, either, even though the
region has performed comparatively better
than the CEE this year. The largest Latin
American countries are among those that
have experienced falls in their ECR bank
stability scores, for instance, contrasting
with smaller countries that have seen an
improvement. Bolivia – an exception to
the rule – has weakened the most, with
a 0.8 point drop in its bank score since
mid-2011, but other countries suffering
from increased bank risk include Argentina,
Brazil, Chile, Colombia and Venezuela – five
of the six largest countries in the region,
measured by GDP. The downgrades in part
reflect susceptibility to increased loan
default following a period of rapid credit
expansion. This has taken place against the
backdrop of a potential shake-out of the
Latin American banking sector, as stronger
regional lenders attempt to gain market
share from Spanish and Portuguese banks
divesting assets - a trend that could persist
if the eurozone crisis worsens.
But bank stability isn’t the only worrying
indicator. In Argentina, the risks of nonpayment/non-repatriation,
information
access/transparency, the country’s
institutions and its regulatory/policy
environment have all deteriorated to
alarmingly low levels. And no wonder.
As reported widely, including in Latin
Finance (‘Argentina Going South’), the
government’s pursuit of nationalization,
through oil company YPF, and other
unorthodox policies – including raising
tariffs, rationing foreign currency to
protect against capital flight, failing to
settle outstanding debts and restricting
dollar-denominated property purchases -
have increased the threat of expropriation,
weakened investor confidence and
exacerbated the uncertainty that is
weighing on the peso. As Richard Segal,
director of emerging markets at Jefferies,
states: “With Buenos Aires running out of
money, the (risk) outlook has been bleak
for some time, but particularly in the
aftermath of YPF.”

18
The 2012 guide to
GLOBAL RISK TRENDS
Falling Brics
In sync with the global trend, confidence in the world’s
emerging powerhouses has slipped this year, but there is
still considerable variation in their individual risk profiles
The glossy veneer surrounding
the world’s emerging
powerhouses - Brazil, Russia,
India, China and South Africa
(the Brics) – has lost some of its lustre,
according to ECR, as all five countries
have become riskier. Outside core
Europe, the Brics group has seen the
biggest average ECR score decline since
January, and not just because of possible
contagion or bank stability concerns.
China slows
China, still the least risky of the Brics, rising
to 36th place in ECR’s global rankings, has
not escaped the scrutiny. ECR’s contributors
have become collectively more cautious
about the country’s economic outlook over
the past 12 months, as evidence mounts
of a slowdown in the breakneck pace of
China’s economic growth. The International
Monetary Fund’s latest (July 2012) World
Economic Outlook Update predicts that the
world’s most populous country will grow by
Government stability is
considered less secure in
light of the civil protests that
have followed the return of
Vladimir Putin as president,
and scepticism over the
president’s avowed political
reforms”
8% this year, down from 9.2% in 2011 and
10.4% in 2010. It seems that the world’s
main economic engine is shifting down
a gear (or two). As Olivier Vojetta, head
of global market research at FM Capital
Partners, and one of ECR’s contributors,
states: “We have been seeing increasing
signs of trouble brewing in the most
populous nation in the world. Business
confidence seems to be drying up as banks,
for the first time in more than seven years,
may fall short of their loan targets.”
Set in a longer-term context, China’s ECR
score has changed little over the past
decade, even though its relative ranking
has improved. China’s failure to improve
its score is indicative perhaps of the failure
among the Chinese elite to convince
international economists and risk experts
that its strong economic growth has been
matched by improvements to the business
environment, rule of law or political
environment. And China’s political risks
have begun to rise lately, not only because
of corruption and governance issues,
but also due to heightened uncertainty
surrounding the leadership transition in
October, which has led to more than the
usual unrest among party factions.
Interestingly, the risks associated with the
regulatory and policy environment in all of
the Brics countries have increased in 2012,
except for India, which already has a low

The 2012 guide to
GLOBAL RISK TRENDS
19
score. It suggests, in part, that credibility
in the legal frameworks governing the
Brics’ financial systems and investor
regimes is waning. This is particularly so
for Russia, which has the lowest score of
any Brics nation for regulatory policy, and
has seen the largest fall so far this year.
ECR’s regulatory and policy environment
indicator aims to measure how well policy
is formulated and/or implemented, by
awarding a score ranging from zero,
where no regulatory environment exists,
to 10, an extremely consistent, wellenforced
environment where government
benevolence exists. It can therefore
provide some indication of the credibility
of the legal framework governing financial
systems. The low score for Russia – only
3.5 out of 10 - contrasts with the country’s
improved rankings in the World Bank’s
Doing Business report, an annual study
of business regulations. ECR contributors
clearly still lack faith in the government’s
determination to deal with the issue.
Brazilian resilience
Brazil, meanwhile, is proving to be the
most resilient of the Brics, with its overall
ECR score falling the least of all during
the past 12 months. This might reflect the
substantial government stimulus under
way to enliven Brazil’s suddenly moribund
economy and prevent unemployment
from rising, efforts to support its foreignexchange
reserves and its relatively stable
political environment. Brazil is one of Latin
America’s highest-rated sovereigns and
one of the most closely watched markets in
the world. Its banking system is considered
more stable than China’s, but the two
countries are also making efforts to face up
to the world’s challenges together. Trade
and investment pacts signed between
them, coupled with a $30 billion currencyswap
arrangement in June, are forming
“ China’s failure to improve its score
is indicative perhaps of the failure
among the Chinese elite to convince
international economists and risk
experts that its strong economic growth
has been matched by improvements to
the business environment, rule of law or
political environment
a closer bond between Asia and Latin
America’s chief powerhouses as a bulwark
against global risks.
Meanwhile, domestic factors – including a
weak business environment – have played a
role in India’s increased risk. And there was
a big drop in ECR contributors’ assessment
of India’s bank stability between
February and March. These concerns were
highlighted by Barclays Bank in Asiamoney
(‘India bank credit quality to remain
sluggish into 2013’), which stated: “The
current economic slowdown, which has
taken a toll on the Indian economy, has led
to a decline in credit quality and increase in
the levels of restructuring. These issues are
not expected to be resolved next year.”
Risks surrounding corruption and
information access/transparency in
India have increased, suggesting it will
take far more than the Central Vigilance
Commission’s e-initiative for web-based
reporting – despite being praised by the
World Bank – to bring about real change
in the country’s endemic climate of graft.
India’s regulatory and policy environment
also appears to have deteriorated in the
eyes of ECR contributors. Yet, whereas
India’s economic assessment score is
lower than Russia’s, its political and

20
The 2012 guide to
GLOBAL RISK TRENDS
structural assessment scores are still
higher, ensuring that India’s fall from grace
has not been catastrophic. Thus, overall,
Russia is considered the riskier sovereign,
contrasting with credit ratings that suggest
the reverse is true.
Cautious on Russia
ECR contributors have adopted a more
cautious assessment of Russia’s political
risk, particularly the survey indicators
for corruption and information access/
transparency, familiar problems that
constitute a legacy of its past. Russia
regularly ranks low down in Transparency
International’s Corruption Perceptions
Index, with graft among the many serious
difficulties of conducting business in
the country. Added to that, government
stability is considered less secure in light
of the civil protests that have followed the
return of Vladimir Putin as president, and
scepticism over the president’s avowed
political reforms.
While much copy has been devoted
to Russia’s political risk profile in the
mainstream media, the deterioration of
Russia’s country risk outlook, as assessed
by ECR’s panel of experts is nonetheless
predominantly an economics-based
story, which in turn reflects downgraded
perceptions of the economic-GNP outlook
sub-factor. However, there has also been
a moderate decline in Russia’s political
risk score, which is the lowest of any
of the Brics. Russia’s country risk score
might have been much lower a decade
ago, when it languished at 98 in the global
rankings in the wake of the government’s
partial default on its short-term debt
obligations. However, sentiment towards
the sovereign has deteriorated lately,
reflecting analysts’ suspicions that
Russia’s commodity-centric economy
is vulnerable to falling energy prices, as
well as the likely impact of a potential
unravelling of the eurozone.
Artem Arkhipov, head of macroeconomic
analysis and research at UniCredit Bank
Russia, a company that takes part in ECR’s
surveys, states in a research note: “Market
turbulence highlights embedded risks: the
high volatility of the [rouble], increased
dependency of the federal budget on oil
prices and persistent capital outflow. We
have revised our forecast to reflect a higher
degree of conservatism and a higher risk of
[rouble] weakening.”
Are the Brics beginning to crack?
ECR ECR 2012 2-year 20-year Fitch Moody's S&P Popn. GDP Growth (%)
Score Rank Change Change Change Rating Rating Rating million 2011 2012 2013
China 61.7 36 +4 0 +6 A+ Aa3 AA- 1,344 9.2 8.0 8.5
Brazil 60.9 39 -1 +3 +27 BBB Baa2 BBB 197 2.7 2.5 4.6
South Africa 56.7 49 -4 -5 -6 BBB+ A3 BBB+ 51 3.1 2.6 3.3
India 52.7 60 -4 -11 -5 BBB- Baa3 BBB- 1,241 7.1 6.1 6.5
Russia 52.2 61 -2 -9 +88 BBB Baa1 BBB 142 4.3 4.0 3.9
Source: Euromoney Country Risk; International Monetary Fund; World bank

The 2012 guide to
GLOBAL RISK TRENDS
21
The new frontiers
Amid the growing risks affecting banking sectors,
currencies, capital repatriation and regulatory systems,
new, safer frontiers are emerging
Not all the world is unsafe, and
treasurers can be consoled by
the fact that several countries
have become distinctly less risky
over the past two decades. North America
remains – just - the safest region for parking
deposits, mainly because of Canada’s
exemplary bank and currency stability
scores; this in spite of recent concerns about
consumer debt and a vulnerable housing
market. Canada and the US also guarantee a
low-risk environment for capital repatriation.
And treasurers seeking a relative haven
of security for deposits should still look
to Europe, Norway in particular. The
sovereign still stands head and shoulders
above the rest of the world as the safest
of ECR’s 186 featured countries, measured
across all aspects of its risk profile. A
build-up of personal credit may be lurking
in the background to trouble the banks,
but Norway’s transparent rules and
regulations, strong fiscal metrics and
less-exposed financial system make it a
valuable benchmark. Switzerland is another,
comparatively untouched by the eurozone
debt crisis and with few inherent risks
despite a booming housing market. The
attractions of Finland (which is a eurozone
member) and Sweden (which is not) are also
obvious given their stable economies, low
sovereign debt burdens and better regulated
financial systems since the Scandinavian
banking crisis of the 1990s.
Oases of calm
Yet the search is also on for new frontiers,
those countries which five or 10 years ago
were considerably risky, but which have
managed to reform and develop at such a
pace that they can now offer relative oases
of calm amid the sandstorm. The Czech
Republic has been mentioned, but Turkey,
rated BB+ by Fitch, Ba1 by Moody’s and BB
by S&P, is also a prime candidate. Home
to some 75 million people, and still hoping
for eventual EU membership, no other
sovereign has improved its global risk ranking
as impressively over the past 20 years,
having jet-propelled itself 101 steps forward
to 55th spot. Turkey’s reduced risks have
encouraged substantial inward foreign direct
investment, which, following a post-2008
lull, totalled $15.9 billion in 2011, according to
the government’s Invest in Turkey agency.
A clutch of mid-sized Turkish banks have
had their credit ratings either reaffirmed or
upgraded by Fitch recently. And Turkish CDS
spreads, which had widened to 337 basis
points in January, were down to 173bp at
the beginning of August, more than 300bp
below their equivalents for Italy and Spain.
But there are even safer parts of emerging
Europe to contemplate, such as Estonia. The
sovereign has climbed a whopping 99 places
to 27th in ECR’s global rankings. Rated A+
by Fitch, A1 by Moody’s and AA- by S&P, the
tiny Baltic state is one of Europe’s paragons
of virtue, boasting a 1% of GDP general

22
The 2012 guide to
GLOBAL RISK TRENDS
government surplus in 2011, and a 6% of
GDP debt burden, with slower but positive
real GDP growth of 2.2% predicted for this
year by the Organization for Economic
Cooperation and Development. As the
eurozone crisis lurks in the background, a
combination of corporate sector vibrancy and
and having climbed from 20th place five
years ago to third in the global rankings, the
country continues to offer much-needed
security amid the global maelstrom. Ranked
as the number-one place for doing business
in 2012 by the World Bank, the IMF notes
in its latest article IV consultation with
The Top-20 Improvers in ECR's Rankings
Source: Euromoney Country Risk
Turkey
Estonia
Uruguay
Russia
Armenia
Peru
Azerbaijan
Georgia
Kazakhstan
Lithuania
2012 Rank
1993 Rank
0 20 40 60 80 100 120 140 160 180
flush household budgets is boosting profits
among the country’s largely foreign-owned
banking system, with its strong links to the
Nordic region.
An impressive rise in ECR’s global rankings
may be a necessary condition for measuring
safer financial systems, but it is not a
sufficient one. Absolute rankings still count.
Moreover, there are some factors in ECR’s
survey more pertinent to treasury decisionmaking
perhaps (bank stability, monetary
policy/currency stability, government
non-payments/non-repatriation, and the
regulatory and policy environment), not that
other economic and political factors should
be ignored.
Port in a storm
Taking this all into account, Singapore stands
out as a reasonably safe bet. Triple-A rated
by the three main credit rating agencies,
Singapore earlier this year, “the financial
system has remained sound, with domestic
banks maintaining strong capital and
liquidity positions, and non-performing loans
remaining low”. While also arguing for close
monitoring of developments to mitigate
corporate sector credit quality issues, the
IMF welcomes the authorities’ “proactive
supervision of banks and measures to
safeguard financial stability, including capital
requirements for Singapore-incorporated
banks that are more prudent than the Basel
III norms”.
Other candidates in Asia include Hong Kong,
Taiwan and Malaysia. All three have seen
their scores diminish over the past couple
of years, but at 10, 17 and 34, respectively,
in ECR’s rankings, they still drive the Asia
region forward. Malaysia has been impacted
by the rise in global risk this year, but its bank
stability indicator has nonetheless improved,

The 2012 guide to
GLOBAL RISK TRENDS
23
650
600
550
500
450
400
350
300
250
200
150
100
50
0
1-1-10
Credit Default Swap Spreads (5yr tenor, % basis points)
highlighting a “sound” financial system,
underpinned by strong capitalization and
liquidity ratios, declining non-performing
loans and few signs of overheating or asset
price bubbles, according to the IMF.
In the Mena region, strong-growing,
hydrocarbons-rich Qatar is the highestplaced
sovereign in ECR’s rankings. Boosted
by the state’s capital injections into seven
domestic banks since 2008, the banks’ tier
1 capitalization reached 20% at the end of
2011, core liquid assets were 34% of total
assets and a sector-wide non-performing
loan ratio amounted to just 2% of total
loans, according to Moody’s latest Banking
System Outlook. However, according to
ECR, Qatar is outdone by Israel in terms of
its key treasury risk indicators, notably so
for repatriation safety and the regulatory
regime. No surprise then that Israel is two
places above Qatar in the World Bank’s
Doing Business rankings, due to its better
credit access, investor protection and ease of
trading across borders.
Pick of the bunch
Across Latin America, several countries
in particular stand out (apart from Brazil),
including Colombia, Mexico and the two
biggest improvers over 20 years: Peru and
Source: Markit
1-3-10
1-5-10
1-7-10
1-9-10
1-11-10
1-1-11
1-3-11
1-5-11
1-7-11
1-9-11
1-11-11
1-1-12
1-3-12
1-5-12
1-7-12
Spain
Italy
Turkey
Estonia
Chile
Uruguay. But the pick of the bunch is the
world’s biggest copper producer, Chile, rated
A+ by Fitch and S&P, and Aa3 by Moody’s,
and an outside bet to become the first
LatAm sovereign to rise into ECR’s top-10
safest sovereigns. Currently lying in 16th
place in the global rankings, having climbed
from 39th two decades ago, Chile’s average
score for the four key treasury indicators is
equal to Germany’s. Plus, despite reduced
bank earnings connected to slower growth
over the first half of this year, Chile’s bank
stability score is higher than Germany’s, an
advantage of not being directly linked to the
eurozone and suggesting only limited risk
exposure to Spain. With real GDP growth of
5.5% year on year over the first half of 2012,
interest rates held at 5% and strong inward
investment supporting a 9% appreciation of
the peso against the dollar since January, the
country is clearly displaying resilience to the
global slowdown.
But risk is a fluid concept and frontiers will
change. With the world still watching how
the eurozone crisis unfolds, treasurers will
need to monitor developments closely in
a timely fashion. Euromoney’s constantlyupdated
Country Risk Survey can certainly
help. For further information go to: www.
euromoneycountryrisk.com.