The impact of war and terrorism on sovereign risk in the Middle East

Abstract

[The prolonged war in Iraq, the political turmoil in Lebanon, the heightened tension between the Israelis and the Palestinians, and the spectre of an attack on Iran have significantly increased business uncertainty in several countries in the Middle East and North Africa (MENA). Sovereign risk — the credit risk assessment to the obligations of central governments — is believed to have increased. In response, credit rating agencies like Moody's and Standard and Poor's have revised their ratings or placed specific countries on their watch lists, a move that normally precedes a credit rating change. Using data from Morgan Stanley and Euromoney, we propose to quantify and explain the variability of sovereign risk in five MENA countries and two control countries between 2002 and 2006 using a set of dates in which a tragic event has taken place. Our methodology will allow us to test the extent to which the heightened political tension in the Middle East has altered the risk profiles of these countries and to challenge the assumptions made by rating agencies.]