A credit rating is an evaluation of the credit risk of a prospective debtor an individual, a business , company or a government , predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
Credit reporting or credit score — is a subset of credit rating — it is a numeric evaluation of an individual's credit worthiness, which is done by a credit bureau or consumer credit reporting agency. A sovereign credit rating is the credit rating of a sovereign entity, such as a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors when looking to invest in particular jurisdictions, and also takes into account political risk.
Ratings are further broken down into components including political risk, economic risk. Euromoney's bi-annual country risk index monitors the political and economic stability of sovereign countries. Best defines "country risk" as the risk that country-specific factors could adversely affect an insurer's ability to meet its financial obligations. A rating expresses the likelihood that the rated party will go into default within a given time horizon.
In general, a time horizon of one year or under is considered short term, and anything above that is considered long term.
International Credit Rating Agencies list pdf Download
In the past institutional investors preferred to consider long-term ratings. Nowadays, short-term ratings are commonly used. Credit ratings can address a corporation's financial instruments i. They use letter designations such as A, B, C.
Higher grades are intended to represent a lower probability of default. Agencies do not attach a hard number of probability of default to each grade, preferring descriptive definitions such as: "the obligor's capacity to meet its financial commitment on the obligation is extremely strong," or "less vulnerable to non-payment than other speculative issues One study by Moody's   claimed that over a "5-year time horizon" bonds it gave its highest rating Aaa to had a "cumulative default rate" of 0.
See "Default rate" in "Estimated spreads and default rates by rating grade" table to right. Over a longer period, it stated "the order is by and large, but not exactly, preserved".
Another study in Journal of Finance calculated the additional interest rate or "spread" corporate bonds pay over that of "riskless" US Treasury bonds, according to the bonds' rating.
See "Basis point spread" in table to right. Different rating agencies may use variations of an alphabetical combination of lowercase and uppercase letters, with either plus or minus signs or numbers added to further fine-tune the rating see colored chart.
The short-term ratings often map to long-term ratings though there is room for exceptions at the high or low side of each equivalent.
Ratings in Europe have been under close scrutiny, particularly the highest ratings given to countries like Spain, Ireland and Italy, because they affect how much banks can borrow against sovereign debt they hold.
These are provided in the table below:.
How credit agencies work
From Wikipedia, the free encyclopedia. Main article: Bond credit rating. Credit Rating and the Impact on Capital Structure. Norderstedt, Germany: Druck und Bingdung.
Retrieved Retrieved 21 September Federal Reserve Bank of New York. Archived from the original PDF on Campaign ". Council on Foreign Relations. Archived from the original on 27 July Retrieved 29 May European Central Bank.
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