Debt: the IOUs of the world.
Sovereign debt is only a part of a nation’s debt. It takes the form of bonds issued by a nation in foreign currencies, sold to foreign investors. It’s a government’s IOUs to foreign investors and countries. Sovereign debt is sometimes conflated with the total national debt, which includes the internal debt of a nation.
Usually, bonds are considered a risk-free investment. That’s because governments can pay you back by raising taxes or printing more cash. But bonds from other nations in not-their-currency...are different. Since sovereign debt isn’t in that country’s currency, it can’t just print more of that currency to pay you back. Exchange rates change, economies can take a turn for the worst. This makes sovereign debt riskier than if you bought bonds from your own country in their currency.
Remember the European sovereign debt crisis? That’s when a bunch of European banks fell apart like a house of cards, which made bond yields jump sky-high. Before the European sovereign debt crisis, economic times were good, so public spending was high...and comfortable. It all came crashing down, as many things did at that time, due to the Great Recession. As banks went under and governments came to their aide, this only put the government in even more debt.
Governments with high debt rightfully get the side-eye from investors, since they're at a higher risk of sovereign default. As the risk of having sovereign debt went up, lenders demanded higher interest rates. Before the European sovereign debt crisis, everyone was more confident in sovereign debt as a good thing. But now, people are skeptical. Pinkie promises on IOUs just don’t cut it anymore.
The crisis was quelled as Europe banded together, working with the IMF to downgrade Eurozone debts and build up confidence. Countries receiving handouts had to meet austerity requirements to rein in government spending. Like we said, sovereign debt isn't the safe haven it once was.
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Finance: What are credit ratings, and ho...40 Views
finance a la shmoop what our credit ratings and how are they interpreted?
well maybe you've heard your parents groan about all of their accumulated
debt or at least you did in high school and you know how it's sinking them. your [kid asks for dinner]
mom put the new fridge and dishwasher on her Amex and now it's all maxed out. your
dad meanwhile invested in a new set of golf clubs and put his flight to Myrtle
Beach on his visa, and now well your dad might have a nice tan and maybe he's
shaved a few strokes off his game, but you and your sister are eating baked
beans out of the can and taking time to 30-second showers to cut down on you
know gas expenses, so credits evil right? you should only pay for something if
you've got the cash right now in your pocket to pay for it right? well no not
right it's true making purchases on credit and be abused and often is but
building credit ie showing the rest of the world that you can borrow money and
then pay off your purchases responsibly whether you're an individual or a
corporation is absolutely essential in making your way through this vast [computer game labyrinth pictured]
complicated world of ours and establishing your own credit rating. so
what really is a credit rating ?well it's a determination of your ability to pay
your debts fully and in a timely manner. all right well there are three major
credit rating agencies who specialize in making these types of evaluations for
the big boys ie large public corporations who borrow money all the
time. the agencies well they're the ones with catchy names like Moody's Standard
& Poor's and Fitch. note that these three are typically used to determine the
reliability of businesses to pay off their debts.
don't confuse credit rating agencies with credit reporting agencies, of which
the major players are Equifax Experian and TransUnion. those guys publish credit
reports assigning credit scores to individuals. so they determine whether
you're able to get that Prius you've had your eye on or whether you can get [orange Prius pictured]
the keys to a nice new condo or whether you can finally upgrade from your
antique typewriter to Mac. but credit ratings indicate whether
someone might want to trust this or that company to make good on their debts.
check out this table which gives you the rundown of Moody's and SNP ratings right
there. don't worry about Fitch for now they're low man on the totem pole .all
right for Moody's anything rated be a three or better is considered investment
grade. for S&P well it's anything triple b-minus or higher. so both agencies would [credit rating chart pictured]
recommend investing in a company's debt at the top of their class, but for any
failing below this line well they've kind of slapped a junk ish bond label on
it. in other words you know and take your chances. the better the grade the better
a company is done in keeping their books checking their boxes crossing their T's
and dotting your I's and likely it means that they're a low risk. and so
they get cheap interest rate. though the odds are paying back their debts are
high when the risk is low and they're encouraged borrow more money until
they're not a good credit risk. well the ones at the bottom of the barrel are
probably sending weekly emails soliciting funds to you know help [sympathetic woman sits behind a computer]
Nigerian Prince's in distress. so those are credit ratings if you find yourself
in a position to care about them well now you know what they mean and how to
interpret them. as for your personal credit score well just make regular
payments don't spend well beyond your means and refrain from ordering one of
everything off Amazon and you should be just fine. [woman shops from computer]
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