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CFA Level I · CFA Level I Exam · Credit Analysis for Government Issuers

A rating agency assigns a sovereign two ratings: one for debt issued in local currency and one for debt issued in foreign currency. The local currency rating is higher than the foreign currency rating. The most likely reason for this difference is that the government:

The local currency rating is typically higher because the government can raise taxes and, through its central bank, create domestic currency to meet local obligations. It cannot print foreign currency, so servicing foreign currency debt depends on reserves and export earnings, which adds credit risk.

  1. Acan raise taxes and, through its central bank, create domestic currency to service local debtCorrect
  2. Bfaces lower interest rates on foreign borrowing than on domestic borrowing
  3. Chas greater legal protection under foreign law than under domestic law

Explanation

A sovereign can use taxation and, via the central bank, money creation to meet local currency obligations. It cannot print foreign currency, so foreign currency debt carries extra risk and often a lower rating. The other options do not explain a higher local rating.

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