What does sovereign risk refer to?

Sovereign risk specifically refers to the likelihood that a foreign government will default on its financial obligations, such as not being able to repay loans or meet other fiscal commitments. This type of risk is particularly relevant for investors and creditors who are dealing with entities in different countries. Factors influencing sovereign risk include the political stability of the country, the economic conditions, and the government’s track record of managing its finances.

The other options provided, while they discuss various risks, do not encapsulate the essence of sovereign risk. Local business failures relate more to commercial risks and do not reflect government actions. The ability of an organization to repay debts pertains to corporate credit risk, which is focused on individual businesses rather than sovereign entities. Lastly, market volatility addresses fluctuations in the financial markets and economic conditions, which can impact investments but is distinct from the risks associated with government defaults.