In the past months lot of country ratings were reviewed in the European region as well as across Asia, I tried to figure out how they are being monitored in the mean while came across an interesting paper on the risk ascertain by the International Banks.
The risk had been divided on the basis of 5 ratings that are issued to access country risk:
- The Country average ratings (CAR)
- The Maximum ratings for corporate (MRC)
- The Maximum rating for Banks (MRB)
- The convertibility rating
- The Sovereign ratings
The Country average ratings CAR is a measure of default risk of counterparties in a given country, it is directly dependent on the systemic credit risk were as the CAR doesn’t take in to account the convertibility risk.
The Maximum ratings for corporates MRC is the possible intrinsic rating for a corporate counterparty.
The Maximum Rating for Banks is the best possible intrinsic rating for bank counterparty. The Maximum Rating for Banks has not the same decisive factors as Maximum Rating for Corporate or as Sovereign Rating. As a result, his level would not be necessary the same for a given country.
The Convertibility Rating assesses the probability of materialization of the convertibility or non-transfer risk. The Convertibility risk is risk that liquidity crises result in a systemic impossibility to access foreign currency, de facto (huge depreciation).
The Sovereign Rating assesses the default risk of the sovereign (central government) on its foreign-currency debt.
(For the Country Average Rating & Maximum Rating are derived from the ratings of private counterparts, Sovereign Rating as simple as it rates the Sovereign and the Central bank for their foreign currency obligations. Convertibility Rating assesses directly the convertibility risk with the addition of a conditional probability of default)