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U.S. loses AAA credit rating from S&P.
- Thread in 'General' Thread starter Started by lukewarm skywalker,
- Start date
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[h1]AAA credit ratings explained[/h1]
The world's biggest net creditor doesn't have the all-important triple-A credit rating, but the world's biggest net debtor does
- Graeme Wearden
- guardian.co.uk, Wednesday 27 July 2011 16.49 BST
- Article history
Credit ratings began as money poured into US railway companies in the 19th century. In the rush to open up the American continent, investors sought information to help them profit without losing their shirts. Photograph: Alamy
As the US risks losing its AAA credit rating, we explain why the coveted top-notch grading matters.
[h2]Where does the AAA rating come from?[/h2]
Rating agencies date back to the 19th century, and the heady early days of the US railways. In the rush to lay track and build railway stations across the American continent, investors craved information to help them profit without losing their shirts. Many railway companies went bankrupt, with some businessmen – among those later dubbed "robber barons" – using borderline-illegal tactics to cripple their rivals.
Henry Varnum Poor (one of the "fathers" of Standard & Poor's (S&P) credit-rating agencies) was one of the first analysts to tackle the railway tycoons. He collected and published analyses of the financial health of the various railroad companies that sprang up across the country. John Moody launched a similar venture, called Analyses of Railroad Investments, in the early 20th century.
Fitch says it was the first agency to create an alphabetical ranking for bonds issues by countries, called sovereign debt, and corporations in 1924. Fitch, Moody's and S&P, in 1975, became the first three companies to be recognised as "statistical rating agencies". Today, there are 10 rating agencies approved by the US securities and exchange commission.
[h2]What is special about the AAA rating?[/h2]
The "triple A" rating is the highest possible rating that can be given to a company or country. S&P says that it only awards AAA when there is an "extremely strong capacity to meet financial commitments". This gold standard means an AAA-rated borrower can usually secure a loan at lower interest rates, as there is much less risk that the money will not be repaid.
[h2]Is AAA a guarantee, then, that a borrower will not default?[/h2]
No. The rating agencies are careful to point out that their opinions exist "within a universe of credit risk", So, there is less chance of an AAA bond defaulting than a BBB one, but still some danger.
[h2]How many countries have an AAA rating?[/h2]
Because the ratings agencies use slightly different methodologies, there is no single list of AAA-rated sovereign debt. As an example, Standard & Poor's have assigned the AAA rating to the following: Australia, Austria, Canada, Denmark, Finland, France, Germany, Liechtenstein, Luxembourg, the Netherlands, Norway, Singapore, Sweden, Switzerland, the United Kingdom and the United States. Territories that are not sovereign are also included: Guernsey, Hong Kong and the Isle of Man.
[h2]Why don't China or Japan make the cut?[/h2]
Japan lost its AAA rating in 2001, when S&P warned that its weak economic growth and large deficit made it more of a credit risk. It is now only rated as AA-, the fourth-highest rating, with S&P. As Credit Suisse's Andrew Garthwaite pointed out, it is ironic that the world biggest net creditor has a lower credit rating than the world's biggest net debtor [the US].
In practice, the lower rating has little impact, as much of Japan's government debt is bought by its own citizens or corporations.
Despite its strong economic growth, China does not qualify for the AAA rating either. S&P says that "contingent liabilities" (ie unknown but possible future debts) in the Chinese banking system could knock its growth off course, and assigns it an AA- grade.
[h2]Does one cut lead to another?[/h2]
Once a country is downgraded once, it can quickly see its rating deteriorate. This happened to Greece, which was cut from A to A- in January 2009, and two years later is about to default.
Gary Jenkins, a City analyst at Evolution Securities, believes that "from a rating agency perspective the first cut is the hardest ... once that initial downgrade has been made, no doubt others will follow."
[h2]Once a triple-A rating is lost, is it gone for ever?[/h2]
No, it is possible to regain the faith of the rating agencies. Back in 1994, Moody's stripped Canada of its "Aaa" rating, citing concern over its rising debts. Seven years later, after a strict austerity programme helped to rebuild the nation's finances, it was upgraded to triple-A.
http://www.guardian.co.uk...credit-ratings-explained
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Honestly I don't feel like I truly understand what this means
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Did yall just post the same article
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I think he posted the article after an edit i swear i was just reading it after he said it on reuters
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I'm kinda in the same boat as you. Really cannot fathom the implications of the downgrade. I do, however, understand that this is going to make my economic future--and that of many other americans--that more difficult...
...
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edited my first post with an article that kinda explains
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Good look...
Gary Jenkins, a City analyst at Evolution Securities, believes that "from a rating agency perspective the first cut is the hardest ... once that initial downgrade has been made, no doubt others will follow."
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It means higher interest rates (barring Fed intervention)
Higher interest rates mean money costs more
Higher interest rates mean money costs more
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These credit ratings are an absolute joke and a huge reason why we're in this economic distress.
They're nothing more than opinions given by these agencies and are more often than not used for their own personal benefit.
They're nothing more than opinions given by these agencies and are more often than not used for their own personal benefit.
They do not speak of the market value of a security, the volatility of its price or its suitability as an investment.
Quoted from Standard & Poor's president Deven Sharma.
Originally Posted by LUKEwarm Skywalker
I'm kinda in the same boat as you. Really cannot fathom the implications of the downgrade. I do, however, understand that this is going to make my economic future--and that of many other americans--that more difficult...
...
Watch Inside Job if you can, it's a great documentary that explains a lot of this stuff.
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UPDATE 7:10 p.m.: S&P is reconsidering its position on a potential U.S. credit downgrade after the Obama administration challenged the credit rating agency's economic model, CNN reports, citing a senior Obama Administration official, who said the analysis was off by "trillions" of dollars.
Politico's Ben White tweets the supposed errors are said to display "incompetence."
Politico's Ben White tweets the supposed errors are said to display "incompetence."
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i'm not sure what S&P was waiting for.....it seems like they were waiting on the sidelines til the debt ceiling crisis was averted and then decided to wait a day for non farm payrolls to come out. I guess the number wasn't enough to the upside to change their minds. Either way, it doesn't bode well for the US and it's citizens as losing the AAA rating means that the faith in our ability to repay debts has been marginalized. This downgrade is inevitably passed down to us as interest rates go up (Higher Treasury Yields are needed to entice investors and reward them for taking on a "risky" asset) and taxes will follow suit.
Cliff Notes:
US Downgraded to AA-.
2 Year window for US to get act together or another downgrade is coming
Higher cost of borrowing for everyone
More unemployment
Double Dip Recession comes to fruition
Potential Depression
it'd be a good time to take your money out of the stock market and wait for the bottom again. Personally, i'm taking everything out monday (a week late, i know) and waiting until the Dow hits 9,500 before I invest again. At that point, it should be a good buying opportunity.
Cliff Notes:
US Downgraded to AA-.
2 Year window for US to get act together or another downgrade is coming
Higher cost of borrowing for everyone
More unemployment
Double Dip Recession comes to fruition
Potential Depression
it'd be a good time to take your money out of the stock market and wait for the bottom again. Personally, i'm taking everything out monday (a week late, i know) and waiting until the Dow hits 9,500 before I invest again. At that point, it should be a good buying opportunity.
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Quoted from Standard & Poor's president Deven Sharma.
You do know that this ratings agency is sanctioned by the government to rate its securities? And do you know there are rules that banks and other institutions are required to only hold the highest rated securities? Once they are downgraded they must change the rule or sell the securities.
The downgrade is official. The downgrade was made AFTER the reconsideration. This is old news (by two hours)
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Think of it like your personal FICO score. If you have a 800 credit score [similar to a AAA rating] you will have the ability to get the lowest interest rates on such things as car loans, mortgages, small business loans whereas if you have a 690 credit score [similar to a AA+] means you will have to pay a bit higher in terms of interest rates. These higher interest rates are then passed off to the consumer in terms of higher loan rates because the government has to pay a higher rate to borrow money [think tax increases] Higher interest rates then affects the price of durable goods and etc.
We'll see how this plays out but this could be absolutely disastrous
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To be honest this downgrade in and of it self is more symbolic than anything BUT...
The only way to keep it from dropping further...
A)Borrow Less (Recession)
B)Borrow the same amount and grow the economy drastically (0 chance barring a revolutionary invention)
C)Cut Spending (Recession)
furrell
Banned
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The politicians who have led us this way are probably laughing it up at their summer homes
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None of this matters to the average american ..
Life goes on
Life goes on
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You do know that this ratings agency is sanctioned by the government to rate its securities? And do you know there are rules that banks and other institutions are required to only hold the highest rated securities? Once they are downgraded they must change the rule or sell the securities.
The downgrade is official. The downgrade was made AFTER the reconsideration. This is old news (by two hours)
Of course but the recent record of these agencies, especially giving high ratings to horrible CDOs in general, make me take everything they report with a grain of salt.
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Pretty much. The pain will be felt at the state and local level more than at the federal.
I can only hope that Wall St. already factored the downgrade into all of the selling this week. The writing has been on the wall for a while so its no surprise for me.
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So is the official report AA+ or AA-??
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AA+ Outlook is negative.
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Guess I better start saving up OD just in case. Harder times are near..
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My country is going down the drain and there's not a god damned thing I can do about it.
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What does this mean for the average american??