Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

Table 1. A Country’s Rating and Spread over U.S. Treasuries

Overall Grade Rating (^) (basis pointsSpread^ ) (basis pointsAverage^ )
Excellent
91 - 100 AAA 10 - 70 50
81 – 90 AA 50 – 100 70
71 – 80 A 80 – 130 100
Average Risk
61 – 70 BBB 110 – 220 160
51 – 60 BB 190 – 300 240
41 – 50 B 270 – 410 350
Excessive Risk
31 – 40 CCC 360 – 490 450
21 – 30 CC 450 – 700 570
10 – 20 C Above 700 800
0 – 10 In Default
Risk Rating Method, a quantitative approach, mixes qualitative and quantitative measures.
Using this method, we compute a weighted average of grades for four aspects of a country. An
analyst grades each factor from zero to 100. A high score indicates a low country risk while a
low score implies high risk. Four factors are:
 Economic Indicators (EI) are easy to obtain and indicate a country’s financial condition.
Economic Indicators include GDP per capita, GDP growth rate, inflation, and interest rates.
Investors are likely to invest in a country with a strong GDP growth rate, low inflation rate,
and stable interest rates.
 Debt Management (DM) indicates a country’s ability to repay a debt and includes money
growth, trade balance, foreign and domestic debt, and a government’s budget deficit. A
country rapidly accumulating debt or experiencing massive trade deficits indicates future
instability. Thus, investors would avoid investing in this country because the government
could impose taxes on investment, impose capital controls, or seizes assets if a crisis
erupts.
 Political Factors (PF) are grades of political stability. A high grade indicates a politically
stable country, while a low grade indicates coups, violent protests, and even a revolution.
This grade includes experts’ opinions because analysts do not have good quantitative
measures for political stability. However, if the measure were good, a forecast could be
wrong because an election or revolution brings new leaders into power who radically
change the rules, regulations, and economy.
 Structural Factors (SF) are socioeconomic conditions, such as education level, healthcare,
and poverty rate.