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CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers

A sovereign government borrows mainly in its own currency and has a central bank able to create that currency. Compared with a sovereign borrowing mainly in a foreign currency, the local-currency borrower is most likely to be viewed as having:

The local-currency borrower is most likely seen as having lower credit risk, because its central bank can create the currency needed to repay debt. The trade-off is inflation and currency depreciation risk, whereas a foreign-currency borrower cannot print the currency it owes.

  1. Aa lower credit risk because it can print money to meet debt obligations, at the cost of possible inflationCorrect
  2. Ba higher credit risk because it cannot influence its own interest rates
  3. Can identical credit risk because currency denomination does not affect repayment ability

Explanation

A sovereign issuing in its own currency can in principle create money to service debt, so default risk is generally lower than for foreign-currency debt. The cost is potential inflation and currency depreciation. The other options misstate the monetary flexibility the issuer has.

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