Download Understanding Standard and Poor`s Criteria for

Understanding 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.
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:-
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.
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.
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.
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.
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.
Source: Understanding Ratings: Standard &
Poor's Rating Services
http://img.en25.com/Web/StandardPoors
Ratings/Sov_Default_2011.pdf
Hope you have understood Standard and Poor’s criteria
for sovereign ratings
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