SOVEREIGN CREDIT RATINGS

SOVEREIGN CREDIT RATINGS

Subject : Economics

Context : S & P Global Ratings on Friday said India’s credit rating would be retained at the current level for the next two years, and the country will see a slightly faster pace of growth in the next couple of years that will support its sovereign rating.

S & P had last year retained India’s rating at the lowest investment grade ‘BBB-‘, with a stable outlook for the 13th year in a row.

Concept :

• A credit rating is a quantified assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation.
• A credit rating can be assigned to any entity that seeks to borrow money—an individual, corporation, state or provincial authority, or sovereign government.
• A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity.
• Sovereign credit ratings can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.
• Investors use sovereign credit ratings as a way to assess the riskiness of a particular country’s bonds.
• Obtaining good sovereign credit rating is usually essential for developing countries in order to access funding in international bond markets.

Rating Agencies

• A rating agency is a company that assesses the financial strength of companies and government entities, especially their ability to meet principal and interest payments on their debts.
• The rating assigned to a given debt shows an agency’s level of confidence that the borrower will honour its debt obligations as agreed.
• The Big Three Credit Rating Agencies: Fitch Ratings, Moody’s Investors Service and Standard & Poor’s (S&P) are the big three international credit rating agencies controlling approximately 95% of global ratings business.
• In India, there are six credit rating agencies registered under SEBI namely, CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings.

Role of Rating Agencies in Capital Markets

• Rating agencies assess the credit risk of specific debt securities and the borrowing entities. In the bond market, a rating agency provides an independent evaluation of the creditworthiness of debt securities issued by governments and corporations.
• Rating agencies also give ratings to sovereign borrowers, who are the largest borrowers in most financial markets.
• Sovereign borrowers include national governments, state governments, municipalities, and other sovereign-supported institutions. The sovereign ratings given by a rating agency shows a sovereign’s ability to repay its debt.
• The ratings help governments from emerging and developing countries to issue bonds to domestic and international investors.
• Governments sell bonds to obtain financing from other governments and Bretton Woods institutions such as the World Bank and the International Monetary Fund.