Country Risk: Determinants, Measures and Implications - The 2026 Edition — Key Takeaways
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Country Risk: Determinants, Measures and Implications - The 2026 Edition
Aswath Damodaran37mJul 15, 2026
Watch the originalThe US equity risk premium is now 4.42% (vs. 4.20% for AAA-rated peers like Germany and Australia) because Moody's stripped the US of its AAA rating in early 2025, creating a measurable default spread of 0.22% that must be backed out of the T-bond rate.
Key takeaways
US lost its last AAA rating (Moody's downgrade to AA1) — T-bonds now carry measurable default spread
US lost its last AAA rating (Moody's downgrade to AA1) — T-bonds now carry measurable default spread
- No ratings agency gives the US AAA anymore; Moody's downgraded in early 2025, adding 0.22% default spread to T-bond rate.
- Nine other countries (Germany, Australia, Netherlands, etc.) now have lower equity risk premiums than the US at 4.2% vs 4.42%.
S&P 500 implied equity risk premium is 4.42% as of July 2026, with 4.2% mature market baseline
S&P 500 implied equity risk premium is 4.42% as of July 2026, with 4.2% mature market baseline
- S&P 500 at ~7,500 on June 30, 2026; IRR solving PV of dividends+buybacks to index level yields 8.65% expected return.
- T-bond rate 4.45% minus 0.22% US default spread (AA1 rating) = 4.23% risk-free rate; ERP = 4.42%.
Using country of incorporation for equity risk premium is indefensible for most large-cap stocks
Using country of incorporation for equity risk premium is indefensible for most large-cap stocks
- S&P 500, FTSE, Nikkei, and Sensex companies all derive substantial revenue outside their home market — assigning domestic ERP misprices risk.
- Coca-Cola gets ~60% of revenues abroad; Infosys ~90%. The 'exception' is actually the norm across major indices.
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In this video
- 1mIntroduction: Why Country Risk Can't Be Ignored
- 4mFour Core Drivers of Country Risk
- 12mClimate Risk as an Emerging Factor
- 13mSovereign Default Risk: Ratings and CDS Markets
- 18mEstimating the Mature Market Equity Risk Premium
- 25mCountry Equity Risk Premium Table and Methodology
- 28mApplying Country Risk to Company Valuation
- 32mCurrency, Risk-Free Rates, and Consistency in Hurdle Rates
- 36mClosing: Country Risk as an Unavoidable Reality
“Currency is a measurement device. It's not the driver of country risk. It's a reflector of country risk.”
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