Financial Risk Manager Part 1

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A credit risk manager at an insurance company is examining the credit ratings on sovereign bonds held in the company's investment portfolio. The manager researches the factors that rating agencies consider when determining sovereign credit ratings. Which of the following statements is correct regarding the process used by rating agencies to rate countries?

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Rating agencies use a country's government debt-to-GDP ratio as the primary debt ratio for assessing the country's sovereign default risk.

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Rating agencies use a country's total debt-to-GDP ratio as the primary debt ratio for assessing the country's sovereign default risk.

A country with a higher government debt-to-GDP ratio will always receive a lower rating than a country with a lower ratio.

A country with an economy concentrated in a few industries will tend to have a more stable tax base, which has a positive impact on its total debt-to-GDP ratio and its rating.