Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. Introduction to Sovereign Ratings Nikola G. Swann, CFA, FRM Director Sovereign Ratings Standard & Poor’s Ratings Services Presentation to Queen’s University, Department of Economics Kingston, Canada November 6 th, 2012

2. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Agenda Essential credit rating concepts Sovereign ratings landscape Methodological framework for S&P sovereign ratings –Examples – Canada, U.S., U.K., France, and Germany Sovereign ratings stability Sovereign ratings performance

3. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Credit Rating Concepts – Relative, Not Absolute Ratings express relative opinions about the creditworthiness of an issuer or credit quality of an individual debt issue, from strongest to weakest, within a universe of credit risk Credit ratings are not absolute measures of default probability

4. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Sovereign Credit Rating Concepts Ability and willingness of the central government to meet financial commitments in full, on time, and unconditionally Standard & Poor’s Ratings Services separately produces a transfer and convertibility (T&C) assessment for each rated sovereign Sovereign ratings do not measure country risk

5. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Rating AAAExtremely strong capacity to meet financial commitments (highest rating) AAVery strong capacity to meet financial commitments A Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances BBB Adequate capacity to meet financial commitments, but more subject to adverse economic conditions BB Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions B More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments CCC Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments CCCurrently highly vulnerable CCurrently highly vulnerable obligations and other defined circumstances DPayment default on financial commitments Source: Standard & Poor’s Ratings Services via standardandpoors.com. Relative Credit Quality Distinctions

6. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Sovereign Credit Rating Landscape Source: Standard & Poor’s Rating Services “Sovereign Defaults and Transition Data, 2011 Update” as of March 2, SD = Selective default.

7. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Recent Sovereign Rating Trends Source: Standard & Poor’s Ratings Services “Sovereign Rating And Country T&C Assessment Histories ” as of October 2, 2012.

8. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Selected Rating And Outlook Histories Source: Standard & Poor’s Ratings Services. All ratings shown are foreign currency, long-term, sovereign credit ratings. Negative Outlook/CreditWatch Negative Positive Outlook/CreditWatch Positive Downgrade Upgrade As of October 30th

9. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Methodological Framework For S&P Sovereign Ratings Source: Standard & Poor’s Ratings Services “Sovereign Government Rating Methodology And Assumptions ” as of June 30, Published June 30, 2011

10. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Economic Score Source: Standard & Poor’s Ratings Services “The Emerging U.S. – ‘AAA’ G-5 Credit Gap And What Could Stabilize Or Widen It” as of September 14, 2011.

11. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Economic Score – G-5 Indicators

12. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. External Score Source: Standard & Poor’s Ratings Services “The Emerging U.S. – ‘AAA’ G-5 Credit Gap And What Could Stabilize Or Widen It” as of September 14, 2011.

13. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. External Score – G-5 External Indebtedness

14. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. External Score – External Liquidity Enduring Global Preference For U.S. Dollars Currency Composition of Official Holdings of Foreign Exchange (% of allocated holdings) U.S. dollarJapanese yen Pound sterlingSwiss franc EurosOther currencies Unallocated holdings (% of identified holdings) All years show fourth-quarter data. Source: IMF

15. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Fiscal Score – Debt Burden Source: Standard & Poor’s Ratings Services “The Emerging U.S. – ‘AAA’ G-5 Credit Gap And What Could Stabilize Or Widen It” as of September 14, 2011.

16. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Fiscal Score – Net General Government Debt

17. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Fiscal Score – General Government Balance

18. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Fiscal Score – Fiscal Performance And Flexibility Source: Standard & Poor’s Ratings Services “The Emerging U.S. – ‘AAA’ G-5 Credit Gap And What Could Stabilize Or Widen It” as of September 14, 2011.

19. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Fiscal Score – Contingent Liability Assessment Source: Standard & Poor’s Ratings Services “Sovereign Government Rating Methodology And Assumptions,” June 30, 2011.

20. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Risk-Adjusted Capital Framework (RACF) Estimate Banking sector’s unexpected losses over a three-year stress scenario Stress scenario involves:  Real GDP decline by as much as 6%  Unemployment rate as high as 15%  Stock market drop as much as 60% Stress scenario losses from aggregating individual bank risk- weighted asset profiles, with risk weights varying according to our BICRA for the country Banking sector contingent liability to sovereign = (RACF losses + 7% of risk-weighted assets) - aggregate total adjusted capital Source: Standard & Poor’s Ratings Services “Sovereign Government Rating Methodology And Assumptions,” June 30, 2011.

21. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Industry Risk Economic Risk BICRA Groups: Lowest to Highest Risk Global BICRA Outcomes Source: Standard & Poor’s, Banking Industry Country Risk Assessment Update: October 2012 (02-Oct-2012 )

22. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Political Score Source: Standard & Poor’s Ratings Services “The Emerging U.S. – ‘AAA’ G-5 Credit Gap And What Could Stabilize Or Widen It” as of September 14, 2011.

23. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. ‘AAA’ Sovereign Ratings Stability Source: Standard & Poor’s Rating Services “Sovereign Defaults and Transition Data, 2011 Update” as of March 2, 2012.

24. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Can A Sovereign Regain A ‘AAA’ Rating…? Since 1975, nine sovereigns have lost their ‘AAA’ rating Of those, five have regained it –Canada after nine years (October 1992 to July 2002) –Australia after 16 years (December 1986 to February 2003) –Finland after nine years (March 1992 to February 2002) –Sweden after 10 years (March 1993 to February 2004) –Denmark after 18 years (January 1983 to February 2001)

25. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Sovereign Ratings Performance S&P Sovereign Foreign Currency Cumulative Average Default Rates*, Source: S&P CreditPro®. N/A - Not available, there are no observations for this horizon. *Default rates conditional on survival. Implied senior debt ratings through 1995, sovereign credit ratings thereafter.

26. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Private Sector And Sovereign Cumulative Default Rates Cumulative Average Default Rates By Rating Over Five-Year Time Horizon Source: Standard & Poor’s Ratings Services.

27. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Related Articles S&P Report Says Europe’s Economic Indicators Are Painting A Bleak Picture, But Country Prospects Differ (Standard & Poor’s, September 25, 2012) Financial Repression Would Hurt the Highest-Rated Sovereigns, But Help Those At The Bottom (Standard & Poor’s, August 30, 2012) Germany ‘AAA/A-1+’ Ratings Affirmed On Strong Economic Fundamentals; Outlook Remains Stable (Standard & Poor’s, August 1, 2012) United Kingdom ‘AAA/A-1+’ Ratings Affirmed; Outlook Remains Stable (Standard & Poor’s, July 27, 2012) United States Of America ‘AA+/A-1+’ Ratings Affirmed; Outlook Remains Negative On Continued Political And Fiscal Risks (Standard & Poor’s, June 8, 2012) France’s Unsolicited Long-Term Ratings Lowered to ‘AA+’; Outlook Negative (Standard & Poor’s, January 13, 2012) Standard & Poor's Puts Ratings On Eurozone Sovereigns On CreditWatch With Negative Implications (Standard & Poor’s, December 5, 2011) The Emerging U.S. – ‘AAA’ G-5 Credit Gap And What Could Stabilize Or Widen It (Standard & Poor’s, September 14, 2011) United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative (Standard & Poor’s, August 5, 2011) United States of America ‘AAA/A-1+’ Ratings Placed On Credit Watch Negative On Rising Risk Of Policy Stalemate (Standard & Poor’s July 14, 2011) Sovereign Government Rating Methodology and Assumptions (Standard & Poor’s, June 30, 2011) United States of America ‘AAA/A-1+’ Ratings Affirmed; Outlook Revised To Negative (Standard & Poor’s, April 18, 2011) Global Aging 2010: An Irreversible Truth (Standard & Poor’s, October 7, 2010) Source: The Standard & Poor’s Ratings Services articles listed above are available on standardandpoors.com.

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