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Would another AAA rating downgrade be serious for the US?

AFP . Paris
27 May 2023 00:00:00 | Update: 27 May 2023 02:07:21
Would another AAA rating downgrade be serious for the US?

The possible loss of its AAA rating from Fitch would be a symbolic blow for the United States as it finds itself on the brink of a debt default because of a political impasse.

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 the 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 United States and Canada. The European Union does too.

What consequences for 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 United States 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.

 

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