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

When assessing the credit risk of a sovereign issuer, which of the following distinctions is most accurate?

The most accurate statement is that a sovereign can raise taxes, but willingness to pay may still be limited. Credit analysis looks at both ability and willingness to pay. Local-currency debt is usually easier to service than foreign-currency debt, and repayment cannot be enforced by seizing assets.

  1. AA sovereign can always repay by seizing private assets
  2. BA sovereign can raise taxes, but its willingness to pay may still be limitedCorrect
  3. CForeign-currency debt is easier to service than local-currency debt

Explanation

Sovereign credit analysis considers both ability to pay and willingness to pay. A government can use taxes and other policy tools, but political factors may limit its willingness to repay. Local-currency debt is generally easier to service because the sovereign can print its own currency, so the third option is reversed.

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