How to differentiate between sovereign ratings and country risk

clock • 4 min read

Many analysts use sovereign ratings as a proxy for country risk, despite the fact they are two distinct risk types, say Marcel Heinrichs and Ivelina Stanoeva at S&P Capital IQ.

The sovereign debt crisis and other fast-paced economic trends trouble credit analysts trying to evaluate the effects on corporate creditworthiness. This process can be extraordinarily problematic - especially considering few financial institutions take a rigorous approach to quantifying country risk. Many analysts simply fall back on existing sovereign ratings - used as a "ceiling" or "cap" on the creditworthiness of domestic businesses - when the two risk types are conceptually distinct. Indeed, sovereign ratings are intended to capture the risk of a sovereign default, while country ri...

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