Seven Assumptions About Highly Rated Sovereigns And Multilateral Lending Institutions

Seven Assumptions About Highly Rated Sovereigns And Multilateral Lending Institutions

When one considers what drives bond prices–such as interest rates, liquidity conditions, currency movements, and investors’ attitudes toward risk–creditworthiness comes pretty far down the list at the higher end of the ratings spectrum. Since 1975, for example, we have lowered only 3% of ‘AAA’ sovereign ratings on average in the ensuing 12 months, 13% over the ensuing five years, and 29% over the ensuing 15 years. By contrast, bond prices have broadly fluctuated in the past four decades. Overall, this level of sovereign credit rating stability is much greater than for corporate and bank ratings. Moreover, the creditworthiness of multilateral lending institutions (MLIs) has been even more stable. We expect the stability of highly rated sovereigns and MLIs to continue. That expectation, however, is founded on a number of assumptions. This article examines seven of them. Some of these apply across all sovereigns or MLIs, while others are issuer-specific.

 

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