Sovereign Debt Ratings

A sovereign debt rating is the credit assessment of particular country provided by international credit rating agencies.

The rating represents the likelihood of the country defaulting on its loan obligations. These ratings are used by investors while making overseas investments.

The ratings take various factors such as economic risk, and political risk into account.

All rating agencies, such as Standards & Poor’s, and Moody’s follow a scale for providing the ratings. For example, Standard and Poor’s has a rating scale where AAA represents the best rating for long-term sovereign ratings. The ratings go down AA+, AA, AA-, A+ and so on. A rating of D means that the country is in default.

The meaning of Standard & Poor’s credit rating opinions is summarized below.

‘AAA’	Extremely strong capacity to meet financial commitments. Highest Rating.
‘AA’	Very strong capacity to meet financial commitments.
‘A’	Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.
‘BBB’	Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.
‘BBB-‘	Considered lowest investment grade by market participants.
‘BB+’	Considered highest speculative grade by market participants.
‘BB’	Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.
‘B’	More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.
‘CCC’	Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.
‘CC’	Currently highly vulnerable.
‘C’	Currently highly vulnerable obligations and other defined circumstances.
‘D’	Payment default on financial commitments.

The lower the rating, the more risky it is to invest in that country. Sovereign ratings are considered very important not only because the national governments are some of the largest issuers in the international markets, but also because the sovereign ratings affect the ratings of many other borrowers within the country. Generally, the rating agencies will not assign a rating to specific issuers that are higher than the rating assigned to its home country.