Investment Risk

Eurocurrency deposits are not insured by regulatory bodies. Therefore the main risk for a depositor is the bank defaulting repayment of the deposit. Also, the government may prevent banks from repaying foreign currency in event of a foreign exchange shortage.

Credit Rating
A banks short-term credit rating is an indicator of the probability of bank defaulting based on the its individual financial strength as well as the country's economic status. The long-term rating is generally higher than short-term as creditors would likely have all or portion of their deposits returned during the liquidation process. Standard & Poor's focus is on attachment probability, Moody's focus is on the expected loss and Fitch's focus combines both the attachment probability and the expected loss. A reason we favour banks partially owned by global major banks, is that the parent will probably assist with capital injections to avoid default of its subsidiary.

Moody's Credit Ratings

Investment Grade
Aaa	highest quality, with minimal credit risk
Aa1, Aa2, Aa3	high quality and are subject to very low credit risk
A1, A2, A3	upper-medium grade and are subject to low credit risk
Baa1, Baa2, Baa3	moderate grade They are considered medim-grade may possess certain speculative characteristics
Speculative Grade
Ba1, Ba2, Ba3	speculative elements and are subject to substantial credit risk
B1, B2, B3	speculative and are subject to high credit risk
Caa1, Caa2, Caa3	poor standing and subject to very high credit risk
Ca	highly speculative and are likely in, or near, default, with some prospect of recovery of principal & interest
C	typically in default, with little prospect for recovery of principal or interest

Fitch's Long-term Credit Ratings

Investment Grade
AAA+, AAA, AAA-	the best quality companies, reliable and stable
AA+, AA, AA-	quality companies, a bit higher risk than AAA
A+, A, A-	economic situation can affect finance
BBB+, BBB, BBB-	medium class companies, which are satisfactory at the moment
Non-Investment Grade
BB+, BB, BB-	more prone to changes in the economy
B+, B, B-	financial situation varies noticeably
CCC+, CCC, CCC-	currently vulnerable and dependent on favorable economic conditions to meet its commitments
CC+, CC, C-	highly vulnerable, very speculative bonds
C+, C, C-	highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
D	has defaulted on obligations and Fitch believes that it will generally default on most or all obligations

Fitch's Short-term Credit Ratings indicate the potential level of default within a 12-month period

Investment Grade
F1+	best quality grade, indicating exceptionally strong capacity of obligor to meet its financial commitment
F1	best quality grade, indicating strong capacity of obligor to meet its financial commitment
F2	good quality grade with satisfactory capacity of obligor to meet its financial commitment
F3	fair quality grade with adequate capacity of obligor to meet its financial commitment but near term adverse conditions could impact the obligor's commitments
Speculative Grade
B	of speculative nature and obligor has minimal capacity to meet its commitment and vulnerability to short term adverse changes in financial and economic conditions
C	possibility of default is high and the financial commitment of the obligor are dependent upon sustained, favourable business and economic conditions
D	the obligor is in default as it has failed on its financial commitments

Correlation Between Defaults & Credit Rating
Moody’s report that the probability of default on a below investment-grade bond is 4%. However, regarding below investment grade banks, there is little correlation between credit ratings and defaults. This implies that the major investment risk is macroeconomic, eg. political.

What Happens if a Bank Defaults
In recent times, when one of a country's major banks has defaulted, the government has almost always bailed out the bank. This is because if a major bank defaults, the government tries to avoid perceptions that the collapse of their financial system is imminent. Hence, the UK's nationalisation of Northern Rock and the Fed's assistance to the Savings & Loans in 1990’s. The Dominican Republic government in 1993 repaid all depositors when 2 of the top 3 banks defaulted.

Myth: In the fact-based movie "Blow", Johnnie Depp's character's Dollar deposits are nationalised by the Panama government. This is fiction and never occurred. The only democratic country where something similar occured was when Argentina briefly froze all USD deposits in 2002 due to foreign exchange shortages.