CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers
Investors rate the local-currency debt of a country higher than its foreign-currency debt. The most likely reason for this difference is that:
The local-currency rating is typically higher because the government can create its own currency to service that debt, whereas it cannot print foreign currency and must obtain it through exports, reserves or borrowing. This makes foreign-currency default more likely.
- Aforeign-currency debt is always issued with shorter maturities
- Bthe government can print domestic currency but not foreign currencyCorrect
- Clocal-currency bonds are guaranteed by the IMF in a default
Explanation
Rating agencies often assign a higher local-currency rating because the government has monetary control over its own currency, but it cannot create foreign currency and depends on reserves, trade surplus or market access. Maturity is not systematically different, and the IMF does not guarantee local bonds.
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