Credit rating, foreign debt, and default

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A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity, which is showing the level of risk associated with lending to a particular country. The mentioned rating is determined by various organizations.  The ratings produced by three organizations Fitch, S&P, and Moody’s are the most authoritative among them.

The history of a country’s credit rating is a guide for the investor, who doesn’t know much about the local macroeconomic situation of this or that country,  which is why a similar rating is likely to be taken into account when making an investment decision.

Thus the position of the credit rating is important for the state, which is determined by several criteria. The political-economic data of the country is important for the assessment, Income per capita,  existing external debt,   level of corruption, history of the default, etc. 

One of the main mentioned criteria for determining the credit rating is the history of default.

When is the state facing default and what are the consequences of announcing it?

Many countries use external debt, which is a debt taken by one government or another from other countries, foreign banks, or international financial institutions, which is characterized by low-interest rates and long term.

External debt poses certain rules and deadlines to the government/state. When a country can’t meet its debt service obligations and repay its debt interest or principal on time, the country faces default.  

Default declaration is extremely harmful to the country and has a negative impact in many areas. Just then The state credit rating is falling to a minimum, which in itself leads to a deterioration of the investment climate,   significant impairment of assets, and the economic crisis, in general.  

Therefore, the credit rating,  external debt, and default have causal links with each other.    The first determines the second, the second-third, and so on. Such a formulation is also possible for the conclusion: Credit rating is remarkable for all countries, the external debt – is a big responsibility, and default – is an undesirable occurrence for everyone.

Note: The following countries have experienced default in the last seven years:   Lebanon and Argentina  (2020 year), Barbados (2018), Venezuela (2017), and  Greece (2015)

Used literature: https://forbes.ge/ra-aris-depholti/, https://www.investopedia.com/terms/d/default2.asp

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