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

When assessing a sovereign's ability and willingness to repay debt, a credit analyst most likely views a country's debt that is issued in its own currency as:

Local-currency sovereign debt typically carries lower default risk than foreign-currency debt. The government can tax and, through its central bank, supply its own currency to meet local-currency obligations, but it cannot print foreign currency. Inflation risk may rise instead, but outright default is less likely.

  1. Acarrying lower default risk than foreign-currency debt, because the government can create the currency to service itCorrect
  2. Bcarrying higher default risk than foreign-currency debt, because local investors demand higher yields
  3. Ccarrying identical default risk to foreign-currency debt, because both are government obligations

Explanation

A government with monetary sovereignty can raise taxes or have its central bank supply local currency to meet local-currency obligations. Foreign-currency debt requires the government to obtain foreign exchange, which it cannot create, so default risk is typically higher. The other options ignore this asymmetry.

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