(3) International investment position

(3) International investment position
 the country's foreign reserves,
 its external debt,
 status of its currency in international markets. 
(4) Fiscal flexibility
 government's willingness and ability to increase revenue or cut expenditures to ensure debt 
service 
 trends in debt as a percentage of GDP. 
(5) Monetary flexibility
 ability to use monetary policy for domestic economic objectives
 credibility and effectiveness of monetary policy. 

Credit rating agencies assign each national government two ratings:
o Local currency debt rating  higher because local currency debt can be repaid by
 raising taxes,
 controlling domestic spending,
 simply printing more money 
o Foreign currency debt rating  historically more default risk 

Sovereign defaults can be caused by events such as war, political instability, severe 
devaluation of the currency, or large declines in the prices of the country's export commodities
c) Non-Sovereign Government Bonds 

Non-sovereign government debt is issued by
o local governments
o quasi-governmental entities.

Municipal bonds: 
o Interest payments from municipal bonds are most often exempt from national income taxes.
o Default rates for municipal bonds are very low relative to corporate bonds. 
o Most municipal bonds can be classified as general obligation bonds or revenue bonds 
General obligation bonds (GO bonds) 
Revenue bonds 
unsecured bonds backed by the full faith credit of 
the issuing governmental entity  supported by its 
taxing power 
issued to finance specific projects, such as airports, 
toll bridges, hospitals, and power generation 
facilities 
Have less credit risk 
Have higher credit risk because the project is the 
sole source of funds to service the debt 
Economic factors to assess in evaluating the 
creditworthiness of GO bonds include
 employment,
 trends in per capita income
 per capita debt,
 tax base dimensions
 demographics,
 ability to attract new jobs 
Analysis of revenue bonds combines analysis of the 
project  analysis of the financing of the project 
o Issues with municipal bonds: 
 Unlike sovereigns, municipalities cannot use monetary policy to service their debt and 
usually must balance their operating budgets 
 Relying on highly variable taxes that are subject to economic cycles, such as capital gains 
and sales taxes, can signal higher credit risk.

Mai Nguyen 
Dawn of Finance 
72 
 Long-term obligations such as underfunded pensions and post-retirement benefits. 
 Inconsistent reporting requirements for municipalities.