Credit Risk and Rating of Sovereign Debt
As we have learned earlier, the investors in bonds are exposed to credit risk as there is a chance that the issuer may default on its obligations. Even though the general perception is that the bonds issued by the government are considered free of default, in reality all bonds expose the investors to credit risk. They are sometimes also referred to as risk-free bonds. The sovereign bonds issued by other country’s governments also have credit risk. To assess the credit risk in these bonds, the rating agencies such as Standards and Poor’s assign sovereign ratings to the bond issues. Sovereign ratings provide an opinion of the level of risk of the investing environment in a country.
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