Download Standard and Poor`s Criteria for Sovereign Ratings

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STANDARD AND POOR’S CRITERIA FOR SOVEREIGN RATINGS
Understanding
Standard and Poor’s Criteria
for Sovereign Ratings
STANDARD AND POOR’S CRITERIA FOR SOVEREIGN RATINGS
The current crisis in Europe has
brought into the spotlight sovereign
creditworthiness and highlighted
the ongoing task of credit ratings
agencies in assessing this issue.
Sovereign government bonds are
issued globally and it is imperative
that investors have globally
recognized and consistent
benchmarks to guide their
investment decisions.
STANDARD AND POOR’S CRITERIA FOR SOVEREIGN RATINGS
There are 3 major credit rating agencies known as Moody's,
Standard and Poor's(S&P) and Fitch.
They account for 90% of the market. The focus will be on Standard
& Poor's to explain their criteria on sovereign ratings.
The list of the criteria is as follows:-
STANDARD AND POOR’S CRITERIA FOR SOVEREIGN RATINGS
1) Institutional Effectiveness and Political Risks: If the judiciary, the
executive and the legislature along with scores of other
institutions such as CAG, Election Commission, Police, and
Defense etc. are robust. Political risk is a reflection of
government stability that indicates whether the government is
enjoying reasonable confidence in both the Houses of
Parliament and whether it is expected to last its complete term.
STANDARD AND POOR’S CRITERIA FOR SOVEREIGN RATINGS
2) Economic Structure and Growth Prospects: This looks at
economic growth and future potential. It may also analyze
the debt to GDP ratio and several other financial ratios to
arrive at the health of the economy.
STANDARD AND POOR’S CRITERIA FOR SOVEREIGN RATINGS
3) External Liquidity and Internal Investment Position: The focal
point is whether FIIs are considering India as a good
destination for investment, whether FDI money is coming in
and whether the domestic investment scenario is good.
STANDARD AND POOR’S CRITERIA FOR SOVEREIGN RATINGS
4) Fiscal Performance and Flexibility: This focuses on if the fiscal
deficit is under control, whether budgetary management is
professional, and if the aid being offered by the government
has any basis or not.
STANDARD AND POOR’S CRITERIA FOR SOVEREIGN RATINGS
5) Monetary Flexibility: If the RBI is robust in its performance,
if it regulates money supply according to the need, whether
inflation is being kept under check, and what the expectations
are going forward.
STANDARD AND POOR’S CRITERIA FOR SOVEREIGN RATINGS
Source: Understanding Ratings: Standard & Poor's Rating Services
http://img.en25.com/Web/StandardPoorsRatings/Sov_Default_2011.pdf
STANDARD AND POOR’S CRITERIA FOR SOVEREIGN RATINGS
Hope you have understood
Standard and Poor’s criteria for
sovereign ratings
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