Sovereign Credit Rating

You’re thinking of buying a sovereign bond, a.k.a. a government-backed bond. The government tells you they’re solid; they’re totally creditworthy, and will definitely pay you back. But are they telling the truth, or are they selling snake oil? Better look up their sovereign credit rating.

A sovereign credit rating is an independent measure of a nation’s creditworthiness, which can be used to compare nations. In the same way that you have to give a lender your FICO score before they decide how high of a credit limit to give you...or whether or not you qualify for a mortgage...you can look up a nation’s sovereign credit rating. Basically their FICO score.

Unlike your FICO, factors that affect sovereign credit ratings include political craziness, a nation’s debt and defaulting profile, economic growth, and other economic indicators. For bigwig nations, sovereign credit rating isn’t a big deal, because their currencies are strong. Except for in 2008...nobody’s sovereign credit rating was looking too good in 2008, especially Greece’s. For nations farther down the economic ladder, their sovereign credit rating is important. The better their rating, the more capital they can attract from foreign investors.

Where can you find these sovereign credit ratings? Standard & Poor’s, Moody’s, and Fitch are the largest agencies that independently score nations’ creditworthiness.