Credit Rating

Your Country’s Credit Rating Matters

Let us consider a hamlet with a trader and his customers. Because that trader knows the customers from close quarters, he can be sure of their ability to pay back what he lends. That makes a trader’s job easy. But what if a trader (or lender) doesn’t know his customer (borrower), something like a lender in one country and borrower in another country? How can a trader assess a borrower’s paying back abilities?

The answer is Credit Rating done by a Credit Rating Agency. By and large Credit Rating is the general assessment of the creditworthiness of an entity. An entity ( a technical term) can be a person, corporate or even a sovereign nation.

In order to give Credit Rating an agency analyzes the accounts of bond or security issuer(you can best understand the terms if you have noticed governments issuing the same in a daily when they are in want of funds to finance certain projects) and its past history for defaulting payments and the future economics of as such.

All most all Big Three Credit Rating Agencies S&P(Standard and Poor’s), Moody’s and Fitch give ratings qualitatively rather than giving a number. They use letters as AAA for the most creditworthy and the least defaulter to C and D the least creditworthy. Some rating agencies use pluses and minuses in addition. If a country’s credit rating is BBB- that means the economy is stable with a medium degree of default. The minus tells to be but watchful of its economy in the near future. Any rating below BBB- indicates risking investment.

A positive rating can boost a country’s investment prospects. In the same way, the opposite can spell doom and subsequently the crash of stock markets. For this is such an important aspect as far as a country’s investment prospects are concerned.

There are numerous other rating agencies, too (like CRISIL ratings and CARE Ratings in India). But they hardly leverage any influence as much as the Big Three but can be taken as alternatives.

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