A credit rating is the assessment of the credit risk of a potential borrower or debtor. Primarily this focuses on the capacity to make repayment of the debt, and therefore implicitly a prediction of the probability or possibility of the debtor not repaying (or defaulting). Sovereign Debt Ratings are a form of credit rating, but applied to the debt of a sovereign state, or in other words, a country. The Sovereign Debt Rating is the credit worthiness of a sovereign entity, usually a national government to repay its National or Government debt. Sovereign dept ratings can play an important part in fundamental analysis.
Who decides on the Sovereign Debt Ratings
A credit rating is evaluated by credit rating agencies, who assign the above-mentioned credit rating. The main three agencies are Standard & Poor’s (S&P), Moody’s Investors Service (Moody’s) and Fitch. Of these, the first two combined control most of the global market (at least 80%).
These credit rating agencies have differing ways of scoring Sovereign Debt and below are the current scores for the larger global economies.
As well as giving the Sovereign Debt Rating, the credit rating agencies also indicate if ratings of countries are potentially about to change. “Rating Watches” signal that there is an increased likelihood of a rating change and the probable direction of any change. These are “Positive Rating Watches”, indicating a prospective upgrade or “Negative Rating Watches”, for a possible downgrade.
Why are Sovereign Debt Ratings important for trading FX?
The credit rating level of any countries Sovereign Debt can have significant impact on the foreign exchange rate of the country. A downgrade, expected downgrade or move to “Negative Rating Watch” in the Sovereign Debt Rating by any of the credit agencies would usually result in the depreciation (fall) in the currency. Conversely, an upgrade in the Sovereign Debt Rating (or anticipated upgrade) or a “Positive Rating Watch” would probably result in a currency appreciation (rise).
Sovereign Debt Rating
Sovereign Debt Rating for Countries
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