Health & Fitness
U.S. Credit Downgrade: What Does it Mean?
Who picks these ratings and how will it affect the U.S. in the long run? Just like your credit score, there are three major companies that handle these ratings.
Before we discuss the complexity of what a downgraded U.S. credit rating means, it is important to understand what the credit rating represents and how a credit rating is decided.
Since 1917, the United States has been rated AAA. The AAA rating means that the chance of defaulting, or not being able to pay your debt, is zero. The rating below that, AA+, would still be a pretty safe bet that you will get paid back, but it does acknowledge a bit of a risk on the lender.
So we know that the rating is dictating the risk taken on by a lender, but who picks these ratings? Just like your credit score, there are three major companies that handle these ratings: Standard and Poor’s, Moody’s Investor Service and Fitch. These companies will take into consideration the borrower’s ability to pay, likelihood of payment and a multitude of other factors which assign a borrower a rating.
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Two of the three, Moody’s Investor Service and Fitch, left the United States with a AAA rating, while Standard and Poor’s decided to downgrade the economy to a AA+.
The fact that two of the three rating companies left the U.S. in its highest possible category bodes well for a lack of a negative impact by lenders to the United States. There is also the fact that the two ratings, AAA and AA+, are so comparable that many lenders do not distinguish between the two. The risk difference is so marginal, meaning it is still a safe bet that payments will be met, the lend is worth the minor risk.
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Even considering the minor downgrade the U.S. did take, we still know the U.S. to have the world’s largest economy and it is believed this will be enough to prevent having to pay more to borrow, although that will take time to truly tell.
However, it is worth noting that economics is driven by a good degree of emotion and a downgrade of any king prays upon people’s fears. Fear has been an ever abundant emotion during the last three to four years, and this can significantly impact the fundamentals of an economy as noted by the recent instability with the stock market.
In the end, there just does not seem to be a great deal of incentive for lenders to shy away from the U.S. and the Standard and Poor’s downgrade will most likely not be an issue in the grand scheme on a long term basis.