Sovereign Risk
Short definition
Sovereign risk is how state solvency, transfer, FX and policy shocks hit firm cash and the discount rate. It is a ceiling separate from firm risk.
Detailed explanation
Channels: CDS, bond yields, FX, capital controls, tax and regulation. CRP is the country add-on in WACC; it is often derived from CDS but must not be mixed with liquidity and beta.
A good firm cannot fully escape a bad sovereign: external finance and FX debt carry the sovereign spread. Local TRY credit is tied to the bank ceiling and monetary policy.
Why it matters for the CFO
Valuation and external credit are incomplete without the sovereign ceiling on top of firm beta. The sovereign ceiling caps the firm’s rating.
How to read it
A fall in sovereign risk does not cut every firm’s Kd equally; the FX gap and the external refinancing share set it.
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Definitions are educational. They are not investment, credit or tax advice.