Lessons for the management of sovereign risk
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Geneva’s experience at the end of the eighteenth century offers several lessons for the management of sovereign risk, lessons with which contemporary wealth managers are well acquainted.
The first concerns concentration. A substantial exposure to a single state, however powerful, makes the investor’s fortune dependent on a single fiscal policy, a single political order and a single currency. Diversification across several sovereign issuers, several currencies and several asset classes reduces that risk.
The second concerns yield. A state that offers returns markedly higher than those of its peers is often signalling a higher level of risk. French annuities paid more than English or Dutch funds precisely because investors perceived French credit as more fragile. The additional yield was compensation for a real risk.
The third concerns transparency. Investors must examine the complete financial position of the borrowing state, including off-budget commitments and extraordinary expenditure. Necker’s Compte rendu demonstrated the limits of partial information.
The fourth concerns governance. A state whose financial management depends on one minister, without solid institutions to guarantee the continuity of its commitments, presents a higher risk. Necker’s reforms were called into question after his departure, and his successors pursued different policies.
The fifth and last concerns political risk. A revolution, a war or a change of regime can radically alter a state’s willingness or ability to honour its debt. That risk is difficult to measure, but it must be taken into account when a portfolio is constructed.
| Lesson | Contemporary application |
|---|---|
| Concentration | diversify sovereign exposures by issuer, currency and region |
| Yield | analyse the yield spread as an indicator of risk |
| Transparency | examine total debt, including implicit and off-balance-sheet commitments |
| Governance | assess the strength of fiscal and monetary institutions |
| Political risk | build in scenarios of political crisis, sanctions and restructuring |
Worked example. A portfolio of CHF 10 million is invested 60 per cent in the bonds of a single state offering a yield of 7 per cent, and 40 per cent in the bonds of better-rated states paying 3 per cent. Its annual return is 5.4 per cent. If the principal state restructures its debt by halving the value of its securities, the portfolio loses CHF 3 million, or 30 per cent of its value, which wipes out more than five years of return. A portfolio diversified in equal shares across five issuers would have limited the loss to 10 per cent in the same scenario. The figures are fictitious and simplified.
For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of September 2025.