how governments offset financial risk
financial risk also refers to the possibility of a government losing control of its monetary policy and being unable or unwilling to control inflation and ultimately defaulting on its bonds or other debt issues governments issue debt in the form of bonds and notes to fund wars build bridges and other infrastructure and pay for their general day to day operations the u s government s debt is treasury bonds they re considered one of the safest investments in the world the list of governments that have defaulted on debt they ve issued includes russia argentina greece and venezuela sometimes these entities only delay debt payments or they pay less than the agreed upon amount it causes financial risk to investors and other stakeholders either way the impact of financial risks on marketsseveral types of financial risk are tied to financial markets many circumstances can impact the financial market it can impact the monetary well being of the entire marketplace when a critical sector of the market struggles as was demonstrated during the 2007 to 2008 global financial crisis businesses closed during this time investors lost fortunes and governments were forced to rethink their monetary policies many other events also impact the market however volatility brings uncertainty about the fair value of market assets it reflects the confidence of the stakeholders that market returns match the actual valuation of individual assets and the marketplace as a whole measured as implied volatility iv and represented by a percentage this statistical value indicates the bullish or bearish view of investments the market on the rise versus the market in decline volatility or equity risk can cause abrupt price swings in shares of stock 1defaults and changes in the market interest rate can also pose a financial risk defaults happen mainly in the debt or bond market as companies or other issuers fail to pay their debt obligations harming investors changes in the market interest rate can push individual securities into being unprofitable for investors forcing them into lower paying debt securities or facing negative returns asset backed securities are pools of various types of loans asset backed risk is the chance that these securities may become volatile if the underlying securities also change in value subcategories of asset backed risk involve the borrower paying off a debt early and ending the income stream from repayments and significant changes in interest rates fitch ratings forecast in december 2023 that the u s high yield default rate will range between 3 0 and 3 5 for 2023 when all figures are compiled fitch expects the rate to rise to between 3 5 to 4 0 in 2024 before dropping to 2 0 to 3 0 in 2025 2