Sovereign Credit Ratings are special types of credit rating systems, which take into account the credit ratings of an independent entity, that is a nation. In fact, sovereign credit ratings signify the levels of risk involved with the investment atmosphere of an autonomous country. This kind of credit rating is used mostly by financiers aiming for huge foreign investments.
Origin of Sovereign Credit Ratings:
The concept of Sovereign Credit ratings emerged during the later stage of the 1980s and the early stages of the 1990, when relatively weaker credits gained control over the market, as the then existing market conditions were ideal for them to issue bonds in the credit markets on a global basis.
Hence, there was a growing demand for proper credit rating services, which coincided with the rising trend of poor quality sovereign credit ratings. This may be considered as the nascent stage of development of the concept of Sovereign Credit Ratings.
Role of Sovereign Credit Ratings in contemporary commercial world:
This type of credit rating has proved immensely beneficial to governments in search of ways to penetrate the global capital markets. This is because most foreign investors, especially the Americans, give preference to rated securities over the unrated ones, while considering the credit risks involved with such investments.
With more and more governments having major defaults risk borrow in the bond markets worldwide, the importance of Sovereign Credit Ratings are increasing day by day.
Sovereign Credit Ratings are extensively used to evaluate the credit-worthiness of the borrowers, on grounds of repayment of the loan amounts.
Disadvantages of Sovereign Credit Rating system:
Sovereign Credit Rating is historically known to be a risky venture in the sense that a burst in the independent lending system may lead a series of defaults on international bonds, as was evident at the time of the Great Depression during the 1920s.
At the time of the Great Depression, the global financial market faced a severe disaster, when a major bulk, about 70% of the total sovereign debts issued by America during 1926-1929 defaulted before the closure of the year 1937.
Coverages offered by Sovereign Credit Ratings:
Local currency issuer and debt ratings
Long-term foreign currency issuer and debt ratings
Temporary foreign currency debt ratings
Companies engaged in Sovereign Credit Ratings:
Standard and Poor’s
The Fitch Ratings Sovereigns Group
Duff and Phelps