What is Sovereign Credit Rating?

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What is Sovereign Credit Rating? Blog Image

Overview:

Global credit rating agency Fitch recently downgraded US Sovereign rating from AAA to AA+.

What is credit rating?

 

  • Credit rating is an assessment of the creditworthiness of a borrower, including an individual, a company or a country.

 

What is Sovereign Credit Rating?

  •  It is an independent assessment of the creditworthiness of a country or sovereign entity.
  • Governments borrow huge funds by issuing debt instruments like government bonds. Creditworthiness here means the ability of the government to pay back its debt without default.
  • Sovereign credit ratings can give investors insights into the level of risk associated with investing in the debt instruments (like bonds) of a given country, including political risks.
  • Standard & Poor's, Moody's, and Fitch Ratings are the three most influential credit rating agencies.
  • When evaluating the creditworthiness of a country, credit rating agencies consider various economic and financial indicators of a country, including its economic growth, fiscal policies, public debt levels, political stability, and external trade position to assign an appropriate credit rating.
  • Why is it important?
    • Obtaining a good credit rating is important for a country that wants to access funding for development projects in the international bond market.
    • Countries with a good credit rating can attract more foreign direct investments.
    • It influences the country's borrowing costs in global financial markets. Governments with higher credit ratings can borrow at lower interest rates, which can save significant amounts of money in interest payments.

 


Q1) What are government bonds?

Government bonds are debt securities issued by a government to raise funds from the public or financial institutions. They are considered one of the safest forms of investment because they are backed by the full faith and credit of the issuing government. When you purchase a government bond, you are essentially lending money to the government for a specified period, and in return, the government agrees to pay you periodic interest payments (known as coupon payments) throughout the bond's term. At the end of the bond's maturity period, the government also promises to return the initial amount you invested, known as the principal or face value of the bond.

Source: Fitch downgrades US rating: How will this impact India and other markets?