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

In sovereign credit analysis, a government that issues debt in its own currency and controls its central bank is most likely to be viewed as having:

The government has a higher ability to repay local currency debt than foreign currency debt. It can tax and, via its central bank, create its own currency to meet local obligations, but it cannot create foreign currency, so foreign currency borrowing carries greater default risk.

  1. Aa lower ability to avoid default on local currency debt than on foreign currency debt
  2. Ba higher ability to repay local currency debt than foreign currency debtCorrect
  3. Cidentical default risk on local and foreign currency debt

Explanation

A sovereign can raise taxes or, through its central bank, create domestic currency to service local currency debt, so its ability to pay is stronger. It cannot print foreign currency, so foreign currency debt carries higher default risk. Options A and C ignore this asymmetry.

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