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criteria and symbols
This
page considers criteria used by rating services in assessing
the credit worthiness of nations and corporations.
sovereign risk
Agencies appear to consider the following matters in assessing
sovereign risk (ie lending to states rather than corporations)
-
Politics
|
-
Stability of the existing government structure
- national/provincial government relations and respective
responsibilities
- Leadership turnover
- basis of political unrest |
-
Homogeneity of population
- Demographic structure
- Educational levels
- Foreign economic and political relations
- Domestic/regional security |
Domestic
economy
|
-
Principal industries
- Agriculture sector
- Natural resources
- GDP |
-
Inflation rate
- Unemployment rate
- Government budget
- Composition of domestic debt |
External
economy
|
-
Principal exports
- Energy imports
- Balance of payments policy |
-
Foreign capital
- Currency stability
- Foreign debt delinquency |
Statistics
(from 5 or more years)
|
-
GDP
- Inflation rate
- Money supply growth
- Export growth rate
- External debt |
-
Leading exports
- Energy imports
- Official external reserves
- Balance of trade
- Balance of payments |
Assessment
is necessarily subjective, since agencies or third parties
such as the World Bank are unable to consistently determine
precise values for some of those measures. Agencies
typically use a weighted averaging process for a single
variable that determines the specific rating awarded to
the country.
symbols
The specific symbols used vary from rating agency to agency.
One comparison is as follows -
| Moody's |
S&P's
|
Fitch |
Institutional
Investor |
Comment
|
| Aaa |
AAA |
AAA |
86-100 |
Prime
or exceptional quality |
| Aa1 |
AA+ |
AA+ |
|
|
| Aa2 |
AA |
AA |
|
Very
high quality |
| Aa3 |
AA- |
AA- |
71-85 |
High
quality |
| A1 |
A+ |
A+ |
|
|
| A2 |
A |
A |
|
|
| A3 |
A- |
A- |
41-55 |
Strong
payment capacity |
| Baa1,
Baa2 |
BBB+,
BBB |
BBB |
56-70 |
Adequate payment capacity |
| Baa3 |
BBB- |
BBB- |
|
Last
rating in 'investment grade' |
| Ba1,
Ba2, Ba3 |
BB+,
BB, BB- |
BB |
29-40 |
Uncertainty
but likely to fulfill obligations |
| B1,
B2, B3 |
B+,
B, B |
B |
20-28 |
Speculative |
| Caa |
CCC+,
CCC, CCC- |
CCC |
17-19 |
Highly
speculative |
| Ca |
C |
CC |
|
Highly
speculative |
| |
DD+ |
DDD |
10-13 |
Junk
- in default or currently vulnerable to default |
| |
D+ |
DD |
|
In
default - recovery unlikely |
|
D |
D |
|
In default - almost valueless |
Concerns
about the interpretation of ratings are highlighted in
Cantor & Packer's 1995 Multiple Ratings &
Credit Standards: Differences of Opinion in the Credit
Rating Industry (PDF)
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