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Sovereign risk is the risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees. The existence of such risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country. Firstly one should consider the sovereign risk quality of the country and then consider the firm's credit quality
Sovereign risk means country risk. When obliger fails to pay or honour as per agreed terms due to change in policy of the obliger's country or introduction of some new rule. Defaulting party can be the country itself or any other party residing in that country. Causes of sovereign risk can be ecnomical or political unrest in the country.
This risk is to be considered while taking exposure in another country.
Its a country risk,state of economic health.Guilt edge securities are best example of sovereign risk.
Sovereign risk largely relates to the people who trade in Forex [foreign exchange]. When people invest in trade of forex and the foreign country changes its foreign exchange policies/rules, then the investors don't get what is owed to them. This risk is called as 'Sovereign Risk'.
