Credit Rating Types Meaning Importance

Sovereign credit rating UPSC

What is Sovereign credit rating?

What is Sovereign credit rating?

Sovereign credit rating is the rating of creditworthiness of sovereign governments in so far as their fiscal management is concerned, particularly the public finance, public debt, Forex, etc.

Credit rating is done by a large number of agencies around the world but the one done by so called big 3 rating agencies, i.e. Standard & Poor's, Moody's, and Fitch Ratings are the three most influential agencies.


Why is credit rating important?

Credit rating is important for those countries who want to raise capital outside their countries via bonds, good sovereign rating reduces rate of interest charged because good sovereign rating normally means less deficits, sustainable financing of debt, better fiscal prudency, etc.


Why are types of credit ratings & what they mean?

Normally credit ratings can be either investment grade or non-investment grade.


Which countries have good and bad sovereign ratings?


Generally, rich and developed countries have good sovereign ratings because people have better financial inclusion & stable population reduces requirement of raising more debt to invest, while poor and developing countries have unstable governments, populist policies, poverty, weak infrastructure that needs investment but fiscal prudency is a challenge.



Can private companies have credit ratings?

Yes, organizations looking to raise capital abroad or looking to raise the price of their shares on share market are assessed by rating agencies either on the request of the organizations themselves or the prospective investors.

Types of credit ratings


Normally credit ratings can be either investment grade or non-investment grade, for one of the big 3 international rating companies, Fitch ratings, following provided are ratings & the connected meaning.

The Fitch rating system breaks entities into two categories, investment grade, and non-investment grade. The investment grade ratings are:

  • AAA: companies of exceptionally high quality (established, with consistent cash flows)
  • AA: still high quality; still has a low default risk.
  • A: low default risk; slightly more vulnerable to business or economic factors
  • BBB: a low expectation of default; business or economic factors could adversely affect the company.

The non-investment grade ratings are:

  • BB: elevated vulnerability to default risk, more susceptible to adverse shifts in business or economic conditions; still financially flexible
  • B: degrading financial situation; highly speculative
  • CCC: a real possibility of default
  • CC: default is a strong probability
  • C: default or default-like process has begun
  • RD: issuer has defaulted on a payment
  • D: defaulted

Top of page