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Answer: Item 2
## Explanation Option B (Item 2) is correct because: - **Increased litigation risk**: Making it easier for investors to sue firms and management increases legal and operational risks for corporations - **Higher business costs**: More litigation leads to higher legal expenses, potential settlements, and management distraction - **Negative for investment climate**: This creates an unfavorable environment for business operations and foreign investment Other items are generally positive: - Item 1: Natural resource wealth (oil reserves) typically **reduces** country risk - Item 3: Legal system independence **improves** rule of law and reduces political risk - Item 4: Declining credit spreads indicate **improving** creditworthiness and lower perceived risk Country risk assessment considers legal, political, economic, and financial factors affecting credit risk.
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Bank QRS is considering extending loans to corporations based in a frontier market country. A credit risk analyst at the bank has conducted research on the country to determine factors that may affect its country risk and has compiled the following findings:
Which of these items is most likely to have a negative impact on the country's risk score?
A
Item 1
B
Item 2
C
Item 3
D
Item 4