sovereign risk investment & finance definition

A legal or political risk that an investment in another country will become worthless because of political turmoil that causes the business environment to collapse or prompts another government to take over and seize foreign assets. A lack of a strong and fair judicial system to enforce contracts and the risk that a government might prevent or limit money from being transferred out of the country to the businesses’ home country are other examples of sovereign risks. Another type of sovereign risk occurs when a foreign government defaults on debt that it owes to foreign banks or governmental-sponsored agencies such as the International Monetary Fund.