156 7. The impact of the shadow economy on the Country Risk Index Miroslava Kostova Karaboytcheva and Luis Rubio Andrada 7.1 INTRODUCTION Nowadays, economic agents face different risks of a different nature (credit, market, liquidity, operational, legal etc.). However, the intention is to analyse the market risks that some economic agents have run into, that is, the probability of suffering loss related to the capacity and predisposi- tion of a state to fulfil the debt obligations undertaken with its creditors. In order to respond to this, different methodologies were elaborated and the literature related to risk measurement has been growing substantially (Babbel, 1996; Bhattacharyya, 1999; Dreher et al., 2005; FMI, 2001). In general, the elements analysed to calculate sovereign risk follow the order: economic, political, social, international etc. The different agencies that estimate it use a wide range of variables, which permits us to obtain the most objective rating possible; thus the intention of this chapter is just to prove that new variables, not taken into account until now, could improve that estimation. Thus, on the one hand, the contribution of this chapter is the introduction of a new variable to the country risk estima- tion, which seems convenient given the results obtained. On the other hand, there is a large number of studies on the causes of the shadow economy, but few that analyse its impacts. We start by introducing country risk, its measurement and the rating agencies. Then, using some selected traditional variables employed by the rating agencies in their estimation of country risk, we find that the mean value for developing and transition countries is negative, which indicates their high country risk and in the case of the developed countries we obtain a positive value, which refers to their low country risk. Thereafter follows a description of the methods, estimation and impor- tance of the shadow economy as a percentage of GDP. This is introduced in the second part of our analysis, where, following the same steps as in Miroslava Kostova Karaboytcheva and Luis Rubio Andrada - 9781781006740 Downloaded from https://www.elgaronline.com/ at 09/13/2024 06:43:53AM via free access