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Credit ratings are one of several tools that investors can use when making decisions about purchasing

bonds and other fixed income investments. Each agency applies its own methodology in measuring creditworthiness and uses
a specific rating scale to publish its ratings opinions. Typically, ratings are expressed as letter grades that range, for example, from AAA to D to communicate the agencys opinion of relative level of credit risk.

Who uses credit ratings


Investors Investors most often use credit ratings to help assess credit risk and to compare different issuers and debt issues when making investment decisions and managing their portfolios. Individual investors, for example, may use credit ratings in evaluating the purchase of a municipal or corporate bond from a risk tolerance perspective. Institutional investors, including mutual funds, pension funds, banks, and insurance companies often use credit ratings to supplement their own credit analysis of specific debt issues. In addition, institutional investors may use credit ratings to establish thresholds for credit risk and investment guidelines. A rating may be used as an indication of credit quality, but investors should consider a variety of factors, including their own analysis. Intermediaries Investment bankers help to facilitate the flow of capital from investors to issuers. They may use credit ratings to benchmark the relative credit risk of different debt issues, as well as to set the initial pricing for individual debt issues they structure and to help determine the interest rate these issues will pay. Investment bankers and entities that structure special types of debt issues may look to a rating agencys criteria when making their own decisions about how to configure different debt issues, or different tiers of debt. Investment bankers may also serve as arrangers of special debt issues. In this capacity, they establish special entities that package assets, such as retail mortgages and student loans, into securities, or structured finance instruments, which they then market to investors. Issuers Issuers, including corporations, financial institutions, national governments, states, cities and municipalities, use credit ratings to provide independent views of their creditworthiness and the credit quality of their debt issues. Issuers may also use credit ratings to help communicate the relative credit quality of debt issues, thereby expanding the universe of investors. In addition, credit ratings may help them anticipate the interest rate to be offered on their new debt issues. As a general rule, the more creditworthy an issuer or an issue is, the lower the interest rate the issuer would typically have to pay to attract investors. The reverse is also true: an issuer with lower creditworthiness will typically pay a higher interest rate to offset the greater credit risk assumed by investors. Businesses and financial institutions Businesses and financial institutions, especially those involved in credit- sensitive transactions, may use credit ratings to assess counterparty risk, which is the potential risk that a party to a credit agreement may not fulfill its obligations. For example, in deciding whether to lend money to a particular organization or in selecting a company that will guarantee the repayment of a debt issue in the event of default, a business may wish to consider the counterparty risk. A credit rating agencys opinion of counterparty risk can therefore help businesses analyze their credit exposure to financial firms that have agreed to assume certain financial obligations and to evaluate the viability of potential partnerships and other business relationships. Rating methodologies In forming their opinions of credit risk, rating agencies typically use primarily analysts or mathematical models, or a combination of the two.

Model driven ratings. A small number of credit rating agencies focus almost exclusively on quantitative data, which they incorporate into a mathematical model. For example, an agency using this approach to assess the creditworthiness of a bank or other financial institution might evaluate that entitys asset quality, funding, and profitability based primarily on data from the institutions public financial statements and regulatory filings.

Analyst driven ratings. In rating a corporation or municipality, agencies using the analyst driven approach generally assign an analyst, often in conjunction with a team of specialists, to take the lead in evaluating the entitys creditworthiness. Typically, analysts obtain information from published reports, as well as from interviews and discussions with the issuers management. They use that information to assess the entitys financial condition, operating performance, policies, and risk management strategies. How agencies are paid for their services Agencies typically receive payment for their services either from the issuer that requests the rating or from subscribers who receive the published ratings and related credit reports. Issuer-pay model. Under the issuer-pay model, rating agencies charge issuers a fee for providing a ratings opinion. In conducting their analysis, agencies may obtain information from issuers that might not otherwise be available to the public and factor this information into their ratings opinion. Since the rating agency does not rely solely on subscribers for fees, it can publish current ratings broadly to the public free of charge. Subscription model. Credit rating agencies that use a subscription model charge investors and other

market participants a fee for access to the agencys ratings. Critics point out that like the issuer-pay model, this model has the potential for conflicts of interest since the entities paying for the rating, in this case investors, may attempt to influence the ratings opinion. Critics of this model also point out that the ratings are available only to paying subscribers. These tend to be large institutional investors, leaving out smaller investors, including individual investors. In addition, rating agencies using the subscription model may have more limited access to issuers. Information from management can be helpful when providing forward looking ratings. (Slide 7scurtez) Investment- and speculative- grade debt The term investment grade historically referred to bonds and other debt securities that bank regulators and market participants viewed as suitable investments for financial institutions. Now the term is broadly used to describe issuers and issues with relatively high levels of creditworthiness and credit quality. In contrast, the term non- investment grade, or speculative grade, generally refers to debt securities where the issuer currently has the ability to repay but faces significant uncertainties, such as adverse business or financial circumstances that could affect credit risk. In Standard & Poors long-term rating scale, issuers and debt issues that receive a rating of BBB or above are generally considered by regulators and market participants to be investment grade, while those that receive a rating lower than BBB are generally considered to be speculative grade. Rating an issuer To assess the creditworthiness of an issuer, Standard & Poors evaluates the issuers ability and willingness to repay its obligations in accordance with the terms of those obligations. To form its ratings opinions, Standard & Poors reviews a broad range of financial and business attributes that may influence the issuers prompt repayment. The specific risk factors that are analyzed depend in part on the type of issuer. For example, the credit analysis of a corporate issuer typically considers many financial and nonfinancial factors, including key performance indicators, economic, regulatory, and geopolitical influences, management and corporate governance attributes, and competitive position. In rating a sovereign, or national government, the analysis may concentrate on political risk, monetary stability, and overall debt burden. Rating an issue In rating an individual debt issue, such as a corporate or municipal bond, Standard & Poors typically uses, among other things, information from the issuer and other sources to evaluate the credit quality of the issue and the likelihood of default. In the case of bonds issued by corporations or municipalities, rating agencies typically begin with an evaluation of the creditworthiness of the issuer before assessing the credit quality of a specific debt issue. In analyzing debt issues, for example, Standard & Poors analysts evaluate, among other things: > The terms and conditions of the debt security and, if relevant, its legal structure. > The relative seniority of the issue with regard to the issuers other debt issues and priority of repayment in the event of default. > The existence of external support or credit enhancements, such as letters of credit, guarantees, insurance, and collateral. These protections can provide a cushion that limits the potential credit risks associated with a particular issue. Recovery of investment after default Credit rating agencies may also assess recovery, which is the likelihood that investors will recoup the unpaid portion of their principal in the event of default. Some agencies incorporate recovery as a rating factor in evaluating the credit quality of an issue, particularly in the case of non-investment-grade debt. Other agencies, such as Standard & Poors, issue recovery ratings in addition to rating specific debt issues. Standard & Poors may also consider recovery ratings in adjusting the credit rating of a debt issue up or down in relation to the credit rating assigned to the issuer. Rating structured finance instruments A structured finance instrument is a particular type of debt issue created through a process known as securitization. In essence, securitization involves pooling individual financial assets, such as mortgage or auto loans, and creating, or structuring, separate debt securities that are sold to investors to fund the purchase of these assets. The creation of structured finance instruments, such as residential mortgage-backed securities (RMBS), asset-backed securities (ABS), and collateralized debt obligations (CDOs), typically involves

three parties: an originator, an arranger, and a special purpose entity, or SPE, that issues the securities.

The originator is generally a bank, lender, or a financial intermediary who either makes loans to individuals or other borrowers or purchases the loans from other originators. > The arranger, which may also be the originator, typically an investment bank or other financial services company, securitizes the underlying loans as marketable debt instruments. > The special purpose entity (SPE), generally created by the arranger, finances the purchase of the underlying assets by selling debt instruments to investors. The investors are repaid with the cash flow from the underlying loans or other assets owned by the SPE. The sovereign rating methodology ("criteria" and "methodology" are used interchangeably herein) addresses the factors that affect a sovereign government's willingness and ability to service its debt on time and in full. The analysis focuses on a sovereign's performance over past economic and political cycles, as well as factors that indicate greater or lesser fiscal and monetary flexibility over the course of future economic cycles. The five key factors that form the foundation of our sovereign credit analysis are: Institutional effectiveness and political risks, reflected in the political score. Economic structure and growth prospects, reflected in the economic score. External liquidity and international investment position, reflected in the external score. Fiscal performance and flexibility, as well as debt burden, reflected in the fiscal score. Monetary flexibility, reflected in the monetary score.

The first step is to assign a score to each of the five key factors on a six-point numerical scale from '1' (the strongest) to '6' (the weakest). Each score is based on a series of quantitative factors and qualitative considerations described in subpart VI.C below. The criteria then combine the political and economic scores to form a sovereign's "political and economic profile," and the external, fiscal, and monetary scores to form its "flexibility and performance profile."

Standard & Poor's analysis of a sovereign's creditworthiness starts with its assessment and scoring of five key rating factors (see table 1).

Each factor receives a score, using a six-point numerical scale from '1' (the strongest) to '6' (the weakest). A series of quantitative factors and qualitative considerations, described in subpart VI.C below, form the basis for assigning the scores. The criteria then combine those five scores to form a sovereign's "political and economic profile," and its "flexibility and performance profile"

A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. credit rating agencies typically analyze
and evaluate both quantitative and qualitative factors when rating an issue.

Only the credit rating companies control this information.


Mathematical formulas are not the sole basis of credit ratings, as credit rating agencies typically analyze and evaluate both quantitative and qualitative factors when rating an issue. Credit ratings are often confused with credit scores. An

individual's credit score, along with his credit report, affects his or her ability to borrow money through financial institutions such as banks The factors that may influence a person's credit score are: ability to pay a loan interest amount of credit used saving patterns spending patterns debt
provide sufficient information to estimate default probabilities.

To obtain the country risk score, assigns a weighting to six categories. The three qualitative expert opinions are political risk (30% weighting), economic performance (30%), and structural assessment (10%). The three quantitative values are debt indicators (10%), credit ratings (10%), access to bank finance/capital markets (10%). Qualitative assessments Economic risk: participants rate each country for which they have knowledge from 010 across 6 sub factors to equal a score out of 100. The categories of economic risk scored are as follows: bank stability/ risk; GNP outlook; unemployment rate; government finances; monetary policy/ currency stability. Political risk: participants rate each country for which they have knowledge from 0-10 across 5 sub factors to equal a score out of 100. The categories of political risk scored are as follows: corruption; government non-payments/ non-repatriation; government stability; information access/ transparency; institutional risk; regulatory and policy environment. Structural risk: participants rate each country for which they have knowledge from 010 across 4 sub factors to equal a score out of 100. The categories of structural risk scored are as follows: demographics; hard infrastructure; labour market/ industrial relations; soft infrastructure.

The quantitative score factors Access to bank finance/capital markets: participants rate each country's accessibility to international markets on a scale of 0-10 (0=no access at all and 10=full access). These scores are averaged and then weighted to 10%. Debt indicators: calculated using the following ratios from the World Bank's Global Development Finance figures: total debt stocks to GNP (A), debt service to exports (B); current account balance to GNP (C). Developing countries which do not report complete debt data get a score of zero. Credit ratings: nominal values are assigned to sovereign ratings from Moody's, Standard & Poors and Fitch IBCA. The ratings are converted into a score using a set scoring chart. This score is then averaged and the score weighted to 10%. The higher the average value the better. Where there is no rating, countries score zero. Economic assessment Bank stability/risk: a measure of banking sector strength. 10 = a perfectly functioning system with all possible exposures comfortably covered. 0 = a systemic breakdown in the banking system has occurred. Economic-GNP outlook: a measure of optimism/ pessimism for the for economic growth outlook. 10 = a strong likelihood of unprecedented and transformational growth. 0 = a strong likelihood of a catastrophic recession. Employment/ unemployment: measures the risk posed to the economy by unemployment. 10 = unemployment poses no risk to the economy. 0 = unemployment poses a critical threat to the economy. Government finances: measures a country's fiscal strength. 10 = the fiscal position is highly solid and consistently generates huge surpluses. 0 = the fiscal position is unsustainable and default is almost certain to occur . Monetary policy/currency stability: a measure of monetary policy effectiveness/exchange rate risk. 10 = monetary policy is totally credible, effectively implemented and exchange rate risk is non-existent. 0 = monetary policy lacks any credibility and that the currency has already collapsed. Political assessment Corruption: a measure of how corruption affects country risk. 10 = there is no corruption. 0 = corruption is endemic and a serious drag on stability and a major contributor of risk. Government non-payments / non-repatriation: a measure of the risk government policies and actions pose to financial transfers. 10 = there is a non-existent risk of government interference. 0 = there is an extremely high risk of government interference. Government stability: a measure of how stable a government is. 10 = the government is extremely stable. 0 = the country has no functioning government and

has already become a failed state. Information access/transparency: a measure of the accessibility and reliability of information and statistics. 10 = the flow of information is completely unrestricted/ data is timely and highly reliable. 0 = the flow of information is totally restricted/ no reliable statistical data exists. Institutional risk: a measure of the independence and efficiency of state institutions. 10 = institutions are extremely efficient and totally independent. 0 = state institutions are non-existent. Regulatory and policy environment: a measure of the quality of the regulatory environment and how well policy is formulated/ implemented. 10 = an extremely consistent, well-enforced regulatory environment and benevolent government policies. 0 = no regulatory environment exists. Structural assessment Demographics: a measure of the impact of the demographic profile on economic growth and political stability. 10 = an economically sustainable birth rate and a low dependency-ratio that is resulting in unprecedented, long-term economic growth. 0 = demographic imbalances have catastrophically affected economic growth and political stability Hard infrastructure: a measure of the adequacy of a country's physical infrastructure. 10 = physical infrastructure meets all the countrys foreseeable needs and is perfectly-maintained. 0 = physical infrastructure is non-existent/entirely inadequate for a countrys needs. Labour market/industrial relations: a measure of the suitability of the labour environment for economic growth and political stability. 10 = a well-regulated and functioning labour environment. 0= a restrictive, volatile and unregulated labour environment. Soft infrastructure: a measure of the health of the economic, medical and cultural/social institutions of a country. 10 = a highly skilled labour force, well supported by perfectly functioning social institutions. 0 = a countrys social institutions are non-existent or have totally broken down

Obligaiunea este un titlu de valoare care atest calitatea de creditor a deintorului ei fa de emitent, emitentul obligndu-se s pltesc deintorului obligaiunii o sum anual fix, numit cuponul obligaiunii, pe ntreaga perioad de valabilitate a acesteia.
Credit ratings and research help investors analyze the credit risks associated with fixed-income securities. Such independent credit ratings and research also contribute to efficiencies in fixed-income markets and other obligations, such as insurance policies and deriv- ative transactions, by providing credible and independent assess- ments of credit risk. Moodys default studies validate our predictive ratings. Our published research and investor briefings draw thousands of attend- ees each year and keep investors current with the rationale underly- ing our credit opinions.

Credit ratings are often confused with credit scores. Credit scores are the output of mathematical algorithms that assign numerical values to information in an individuals credit report. The credit report contains information regarding the financial history and currentassets and liabilities of an individual.
The sovereign rating methodology ("criteria" and "methodology" are used interchangeably herein) addresses the factors that affect a sovereign government's willingness and ability to service its debt on time and in full. The analysis focuses on a sovereign's performance over past economic and political cycles, as well as factors that indicate greater or lesser fiscal and monetary flexibility over the course of future economic cycles. 8. The five key factors that form the foundation of our sovereign credit analysis are: Institutional effectiveness and political risks, reflected in the political score. Economic structure and growth prospects, reflected in the economic score. External liquidity and international investment position, reflected in the external score. Fiscal performance and flexibility, as well as debt burden, reflected in the fiscal score. Monetary flexibility, reflected in the monetary score.

The first step is to assign a score to each of the five key factors on a six-point numerical scale from '1' (the strongest) to '6' (the weakest). Each score is based on a series of quantitative factors and qualitative considerations described in subpart VI.C below. The criteria then combine the political and economic scores to form a sovereign's "political and economic profile," and the external, fiscal, and monetary scores to form its "flexibility and performance profile." Standard & Poor's analysis of a sovereign's creditworthiness starts with its assessment and scoring of five key rating factors (see table 1).

Each factor receives a score, using a six-point numerical scale from '1' (the strongest) to '6' (the weakest). A series of quantitative factors and qualitative considerations, described in subpart VI.C below, form the basis for

assigning the scores. The criteria then combine those five scores to form a sovereign's "political and economic profile," and its "flexibility and performance profile"

Assessing The Five Main Sovereign Rating Factors


35. The analysis of each of the key five factors embodies a combination of quantitative and qualitative elements. Some factors, such as the robustness of political institutions, are primarily qualitative, while others, such as the economy, debt, and external liquidity use mostly quantitative indicators.

1. Political Score
36. The political score assesses how a government's institutions and policymaking affect a sovereign's credit fundamentals by delivering sustainable public finances, promoting balanced economic growth, and responding to economic or political shocks. 37. The political score captures the factors listed below, which are uncorrelated with any particular political system: The effectiveness, stability, and predictability of the sovereign's policymaking and political institutions (primary factor). The transparency and accountability of institutions, data, and processes, as well as the coverage and reliability of statistical information (secondary factor). The government's payment culture (potential adjustment factor). External security risks (potential adjustment factor).

The potential effect of external organizations on policy setting (potential adjustment factor).

2. Economic Score
51. The history of sovereign defaults suggests that a wealthy, diversified, resilient, market-oriented, and adaptable economic structure, coupled with a track record of sustained economic growth, provides a sovereign government with a strong revenue base, enhances its fiscal and monetary policy flexibility, and ultimately boosts its debt-bearing capacity. We observe that market-oriented economies tend to produce higher wealth levels because these economies enable more efficient allocation of resources to promote sustainable, long-term economic growth.

52. The following three factors are the key drivers of a sovereign's economic score: Income levels. Growth prospects. E Economic diversity and volatility. The criteria derive an initial score based on a country's income level, as measured by its GDP per capita

b) Economic growth prospects


The key measure of economic growth is real per capita GDP trend growth. More specifically, the real per capita GDP trend growth is the average of six years historical data, our current year estimate and three-year forecasts. The latest historical year, current year estimate, and forecasts are weighted 100%, while previous years are assigned a lower weight in order to avoid a cliff effect when an exceptional year drops out of the 10-year average. The source for historical data is national statistics. Such estimates are generally derived from empirical observations based on the recent past and longer-term historical trends, and they attempt to look through the fluctuations of an economic cycle, during the period being analyzed. he criteria use the average growth in a country's real per capita GDP over a 10-year period, which generally covers at least one economic cycle

c) Economic diversity and volatility

3. External Score
The external score reflects a country's ability to generate receipts from abroad necessary to meet its public- and private-sector obligations to nonresidents. It refers to the transactions and positions of all residents (public- and private-sector entities) versus those of nonresidents because it is the totality of these transactions that affects the exchange rates of a country's currency. Three factors drive a country's external score: The status of a sovereign's currency in international transactions. The criteria assign a better external liquidity score to sovereigns that control a "reserve currency" or an "actively traded currency." These sovereigns have a common attribute: Their currencies are used (widely for reserve currencies) in financial transactions outside their own borders, which means that they may be less vulnerable to shifts in investors' portfolios of debt holdings than are other countries Sovereigns with a reserve currency. A sovereign in this category benefits from a currency that accounts for more than 3% of the world's total allocated foreign exchange reserves Sovereigns with an actively traded currency. A sovereign in this category benefits from a currency that accounts for more than 1% of global foreign exchange market turnover The country's external liquidity, which provides an indication of the economy's ability to generate the foreign exchange necessary to meet its public- and private-sector obligations to nonresidents. The key measure of a country's external liquidity is the ratio of "gross external financing needs" to the sum of current account receipts plus usable official foreign exchange reserves The "gross external financing needs" in table 5 is the average of the current-year estimate and forecasts for the next two to three years. Standard & Poor's forecasts a country's gross external financing needs first by reviewing the country's historical balance of payments and international investment position, the official government and the central bank's own forecasts (when available), and those of independent economists and the IMF Usable foreign exchange reserves represent the sum of liquid claims in foreign currency on nonresidents under the control of the central bank and gold holdings.

The country's external indebtedness, which shows residents' assets and liabilities (in both foreign and local currency) relative to the rest of the world. 72. Standard & Poor's key measure of a country's external indebtedness is the ratio of "narrow net external debt" to current account receipts The term "narrow" in the description of net external debt refers to a more restricted measure than some widely

used international definitions of net external debt. The calculation of "narrow net external debt" subtracts from gross external indebtedness only the most liquid external assets from the public sector and the financial sector

4. Fiscal Score
The fiscal score reflects the sustainability of a sovereign's deficits and debt burden. This measure considers fiscal flexibility, long-term fiscal trends and vulnerabilities, debt structure and funding access, and potential risks arising from contingent liabilities. The analysis is divided into two segments, "fiscal performance and flexibility" and "debt burden" which are scored separately. The overall score for this rating factor is the average from the two segments. 81. To determine a sovereign's fiscal performance and flexibility score, these criteria first derive an initial score based on the prospective change in nominal general government debt calculated as a percentage of GDP. The key measure of a government's fiscal performance is the change in general government debt stock during the year expressed as a percentage of GDP in that year.

The government is able and willing to raise revenues through increases in tax rates, in tax coverage, or through asset sales in the near term. Revenue flexibility is a qualitative assessment based on the government's policy or track-record, but also taking into account the potential constitutional, political, or administrative difficulties, as well as potential economic or social consequences of such measures

b) Debt burden
89. The debt burden score reflects the sustainability of a sovereign's prospective debt level. This score also reflects risks arising from contingent liabilities with the potential to become government debt if they were to materialize.

5. Monetary Score
107. A sovereign's monetary score reflects the extent to which its monetary authority can support sustainable economic growth and attenuate major economic or financial shocks, thereby supporting sovereign creditworthiness. Monetary policy is a particularly important stabilization tool for sovereigns facing economic and financial shocks. Accordingly, it could be a significant factor in slowing or preventing a deterioration of sovereign creditworthiness in times of stress.

Lingueala niciodat nu izvorte din sufletele mari, e apanajul sufletelor mrunte ce izbutesc s se faca i mai mici pentru a intra mai bine n sfera vitala a persoanei n jurul creia graviteaz