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

A sovereign has a local-currency rating of A and a foreign-currency rating of BBB. The difference between the two ratings is most likely explained by the:

The gap most likely reflects the sovereign's ability to print its own currency to service local-currency debt. Foreign-currency obligations require obtaining foreign exchange, which the government cannot create, so rating agencies typically assign them a lower or equal rating than local-currency debt.

  1. Asovereign's ability to print its own currency to service local-currency debtCorrect
  2. Bgreater taxing power over foreign investors than domestic residents
  3. Clower coupon rates usually offered on local-currency bonds

Explanation

A sovereign with monetary control can create local currency to meet local-currency obligations, lowering default risk. Foreign-currency debt requires acquiring foreign exchange, which is a constraint. Coupon rates do not drive rating differences.

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