Question

Explain why ratings agencies assign foreign currency and domestic currency ratings to debt ratings for sovereign debt. Explain what factors are considered when these ratings are made.

Answer 1

Rating agencies always assign foreign currency and domestic currency rating to sovereign debt because there is a exchange rate factor involved in this debt rating and due to that exchange rate, the ability of the government to pay the debt is affected to a very high extent.

For example, if Indian government in India has issued a sovereign debt, and it is always affected by the currency rate fluctuations because, if the rupee depreciates against the dollars, it will be affecting the the payment capability of the government to a very high extent, so there is a currency rate factor which is assigned to this credit rating and that is why, it is always assigned with twin credit rating.

Factors which are considered when these ratings are made are-

A. exchange rate fluctuation will always be considered of the domestic currency in regards to the foreign currency.

B. Repayment capability of the government should always be considered.

C. Other macro factors like inflation and interest rate should also be considered.