EECS 1541 Lecture Notes - Lecture 38: Credit Risk
24 Jun 2018
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EECS 1541 Lecture 38 Notes
Introduction
Supply of a Currency for Sale
When one country experiences weak economic conditions, its consumers tend to
reduce their demand not only for local products but also for foreign products.
The credit risk of the local firms increases because the weak economy reduces their
revenue and earnings, which could make it difficult to repay their loans.
Furthermore, as the country’s consumers reduce their demand for foreign products, the
producers of those products in foreign countries experience lower revenue and earnings
and so may not be able to repay their loans to creditors within their own country.
In this way, higher credit risk in one country is transmitted to another country.
This process is sometimes referred to as credit contagion, which means that a high
credit risk in one country can infect other countries whose economies are integrated
with it.
Contagion effects associated with the economic crisis in Greece are discussed in the
next section.
Another reason why general credit risk levels are correlated is that creditors from
various countries participate in international syndicated loans
So that all the participating creditors suffer when borrowers based in a particular
country suffer.
This dynamic can create financial problems for commercial banks in various countries
that specialize in loans.
Many firms in any country rely heavily on local banks for credit.
When these banks suffer losses because of defaults on their loans, they tend to reduce
the amount of credit extended to borrowers.
Thus, their financial losses from loans to one country may cause them to limit their
loans to borrowers in other foreign countries or to those within their own country.
As banks extend less credit, firms have less access to funds, which restricts their growth.
Document Summary
When one country experiences weak economic conditions, its consumers tend to reduce their demand not only for local products but also for foreign products. Thus, their financial losses from loans to one country may cause them to limit their loans to borrowers in other foreign countries or to those within their own country. As banks extend less credit, firms have less access to funds, which restricts their growth. A country"s economy tends to weaken when the credit available to its firms is restricted. Having considered the u. s. demand for pounds. One country experiences weak economic conditions, its consumers tend to reduce their demand not only for local products but also for foreign products. The credit risk of the local firms increases because the weak economy reduces their revenue and earnings, which could make it difficult to repay their loans. In this way, higher credit risk in one country is transmitted to another country.
