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

Which factor is most likely to indicate a sovereign's willingness, rather than ability, to pay its debt?

Willingness to pay is best indicated by a sovereign's repayment record and the strength of its institutions. Because creditors cannot easily enforce claims against a sovereign, political commitment matters. Reserves and per capita income instead reflect ability to pay.

  1. ASize of its foreign exchange reserves
  2. BTrack record of honoring obligations and strength of its institutionsCorrect
  3. CLevel of per capita income

Explanation

Willingness relates to political and institutional factors and payment history, since a sovereign cannot be forced through bankruptcy courts. Reserves and income measure capacity, not willingness.

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