• A is correct. Rating agencies look to the ratio of government debt to GDP when rating countries.
• B is incorrect. See A above. Debt issued by a government is not a country’s total indebtedness.
• C is incorrect. A country’s government debt-to-GDP ratio is evaluated in conjunction with other factors that make the country’s true debt burden lesser than what is suggested by the ratio. For example, in the case of Japan (as discussed in the reading), adjusting for the large amount of assets held by the government reduces the debt-to-GDP ratio from >200% to <100%. Also, on table 5-6, the text provides examples of several countries, such as Russia, Brazil, and India, which have much lower government debt-to-GDP ratios than the US. These countries are exposed to other risks such as inflation or political risks which also impact their rating.
• D is incorrect. Countries with diversified economies will tend to have a more stable tax base than those that depend on one or two industries.

Learning Objective: Describe factors that influence the level of sovereign default risk; explain and assess how rating agencies measure sovereign default risks.

Reference: Global Association of Risk Professionals, Valuation and Risk Models (New York, NY: Pearson, 2023). Chapter 5. Country Risk: Determinants, Measures, and Implications [VRM-5]