What do you mean by country risk in the context of a credit portfolio?
According to Joseph (2013) country risk and sovereign risk develop when a bank or financial institution in one country extends credit to obligors in other countries, whether through a loan or otherwise. As a result, international banks, financial institutions, and enterprises with cross-country credit exposures may find it necessary to achieve dispersion among several nations in their day-to-day operations.
Cross-border financing entails some degree of country risk. Assume Bank XYZ lends to consumers in two different countries: Country A and Country B. If Country A’s perceived country risk is higher, then credit pricing on the credit asset in Country A should be higher, holding other things constant.
References
Joseph, J. 2013.