CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers
An analyst assesses a sovereign's ability to repay foreign-currency debt. Which development would most likely increase the sovereign's credit risk?
Credit risk most likely rises when more short-term debt is held by non-residents while reserves shrink. Foreign holders can withdraw quickly, and the government has less foreign currency to meet repayment. Current account surpluses and lower external debt relative to reserves improve repayment capacity.
- AA rising current account surplus financed by export growth
- BA falling ratio of external debt to foreign exchange reserves
- CA growing share of short-term debt held by non-residents and a shrinking reserve balanceCorrect
Explanation
Short-term debt held by foreigners can be withdrawn quickly, and shrinking reserves reduce the buffer to repay it in foreign currency. The surplus and falling external debt relative to reserves both improve capacity to pay.
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