How to Calculate Credit Rating of a CompanyCalculating the creditworthiness of a company
How does creditworthiness affect countries?
Credit rating is an assessment of the safety of sovereign debt. These are prepared by rating firms that assess several different elements and determine their probability of failure. An AAA rating means that the loan is safe. Obtaining June Debt approval means that the federal administration is likely to fall behind.
Yet she recently loses her triple-A credit rating. Above chart shows the ratio of public debt to gross domestic product (GDP) for France and the United Kingdom since 2006. S&P rates it AA+, which is the second highest credit rating.
In France, it provoked some dismay that the UK maintained the highest AAA credit rating, despite a much higher sovereign bond ratio. Large public deficits do not mean that the governments are behind schedule. In the past, the United Kingdom had much higher public debts (see: historic public debt) - and never called in.
It is a contributory element in the UK's ability to maintain its AAA rating. Which factors influence the creditworthiness? Creditworthiness is defined by whether there is a reasonable possibility that the state will be in arrears with interest payment and repayment of its debts. The amount of public indebtedness. Assuming a relatively low public deficit, e.g. 3-5% of GNP, this is likely to be sustained.
If, however, public indebtedness exceeds 10% of GNP, the risks of sustained public indebtedness expansion are much higher. However, what represents a sustained credit rating will depend on, for example, the UK having raised more than 10% of UK GNP without loosing its AAA rating. The amount of public indebtedness. Not only the annuity of debts is important, but also the entire amount of debts owed.
The French have reduced their public deficits, but due to low economic expansion, their overall public indebtedness has increased (see chart below). When Greece, for example, converted 100% of its debts into GNP, market participants found this untenable. However, here too indebtedness as a percentage of GNP is only one of the factors.
Spain's public indebtedness is quite low (around 70% of GDP), but has a lower credit rating than Japan with a 230% of BIP deficit. Predicting expansion of an Economy will result in higher fiscal revenue and a reduction in joblessness, which will facilitate the reduction of indebtedness relative to GDP.
An important reason for the deterioration in the credit ratings of eurozone countries such as Greece, Portugal and Spain is that they are likely to be in the midst of a downturn. It will therefore be difficult to lower the debt-to-GDP ratio, despite its massive expenditure cutbacks. Interest on debts in percent of GNP.
Interest in the UK exceeds £40 billion per annum (around 3% of GDP). If interest remains low, even if the public sector deficit rises further, interest is still reasonable. But if a nation has a fast rising level of indebtedness, the market is driving interest rate up (see: Euro Interest Rates).
At that point, however, governments will face the unhappy mix of increasing interest rates on debts. And even if they reduce expenditure, they have to pay the additional amount for debts. Whose debts are these? When the debts are held by resident private persons and resident retirement benefit plans, the liability is less risk averse to exodus of principal.
If, for example, a continental nation like Greece has debts to overseas residents, aliens will be selling their Greece loans if residents worry that Greece will end up abandoning the euro. So much credit has been raised in Japan because of strong home market demands for the purchase of Japan's sovereign bond.
There is no need for Japan to rely on overseas investment. Due date of debts. For the United Kingdom, the duration of the public debt is quite high. Liabilities in Great Britain have an averaging term of more than 17 years. As a result of this long-term credit, there is less downward pressure on the UK to obtain short-term refinancing. Once a nation has financed its debts by the sale of short-term gilt and bond issues, it must continue to sell them.
The returns on fixed -income securities are a guideline for the perception of authenticity in the markets. I am sure that if Britain were in the eurozone, the United Kingdom would not have an AAA rating. There is a need to recall that credit rating companies are not unfailing. The rating authorities gave the US mortgages a AAA rating.
Rating firms usually mirror the mood of the markets - they do not cite it. Which rating agency do you use? How does it determine how much the state can lend?