Such a downgrade is not unprecedented – S&P Global yanked Washington’s AAA rating during the 2011 showdown over the debt limit – and would probably have few immediate consequences for the world’s biggest economy, whose debt is highly sought after on the markets.
What’s a AAA rating?
It is the top rating assigned by credit ratings agencies on debt issued by governments and companies.
The three main ratings agencies – S&P Global, Fitch and Moody’s – use a letter system ranging from AAA to D (for defaults), passing through B and C.
They are an indication for investors of entities’ capacity to repay their debts. When assigning a credit rating, an agency will look at factors including the country’s growth rate, debt levels, spending, tax revenue, and political stability.
The lower a country’s rating, the more investors will be inclined to seek a higher interest rate to buy their debt, in order to compensate for the elevated risk.
What countries have AAA ratings?
Only a few countries still have AAA ratings from all three top agencies: Australia, Denmark, Germany, the Netherlands, Norway, Singapore, Switzerland, and Luxembourg.
Several others have AAA ratings from one or two of the agencies, such as the US and Canada. The European Union does too.
What consequences of losing a AAA rating?
The loss of a AAA rating sends a signal to investors. Whether it has just symbolic value or a real economic impact depends on the country and the context.
France lost its AAA ratings along with several other countries following the 2008 global financial crisis. Its borrowing costs were already going up, as were other countries, but it did not see lenders flee.
US borrowing costs also rose after it lost its AAA rating from S&P Global in 2011 – but the US has a major advantage.
“The US dollar is the pre-eminent world’s reserve currency, and we view the risk of exchange and capital controls as de minimis,” Fitch said Thursday when it put the US rating on notice for a possible downgrade.
The role of the greenback as the currency for transacting most global business could eventually be put at risk by default but, in the short term, demand for dollars could spike as it is a haven currency in a time of global turmoil.
The need to hold dollars for commerce means US bonds would still probably find buyers, even though Washington may have to pay higher interest rates.
Fitch has had the US rating at risk of being lowered since 2013, but so far has not cut it.
Fitch, which has rated the US since 1994, and Moody’s, which has done so since 1949, have never lowered their US ratings.