Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey, Hong Kong, Isle of Man, Liechtenstein, Luxembourg, Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland, and the United Kingdom. What do all of these sovereign states have in common? As of yesterday, Standard and Poor’s rates their debt as a lower default risk than debt from the United States.
S&P Ratings – and Ratings in General
By our count, S&P rates 120 sovereign entities on their credit worthiness. In short, a credit rating is an independent firm’s evaluation of the ability of a borrower to repay its bets. You can look at credit ratings from a ratings agency as you do as a personal credit score – it is an indicator of a borrower’s ability to repay debt, and affects the rates which are demanded when a borrower wishes to borrow money. We at DQYDJ normalized S&P’s credit worthiness scores from 12 to -12, with AAA being a 12, C- being a -12, and the median, 0, being a BB-. In the World Map below, we are showing the ‘Domestic Normalized Credit Rating’, but you can switch views to see the other categories. This data is all posted at IBM‘s Many Eyes visualization site; please download it, check it over it, and edit it. Let us know what you do with it and we will be sure to link to any derivative work!
How Much Does a Downgrade Matter?
When it comes to an individual borrower, a credit score is incredibly useful before borrowing is possible. While credit card companies, banks, car lots, and all sorts of other businesses issues credit, it is impossible for them to have a profile on every borrower who comes through the door seeking credit. The same reasoning doesn’t quite apply to the credit worthiness of the United States. Since the United States is such a huge user of credit and so well known (with its finances so public) it is likely that investors in government debt will make their own calculations of what they are willing to pay for it. Additionally, S&P had warned that it was looking at a debt ceiling deal in the range of a $4 trillion reduction in planned spending over the next decade, so the downgrade itself shouldn’t come as a huge surprise to the market.
The bottom line is that investors who are mandated to only invest in AAA rated government securities may be prohibited from buying debt from the United States. However, at the end of the day, the most important factor for the United States (or the individual investor!) is the cost of borrowing – on Friday the Treasury reported 10 year debt as only yielding 2.58%. The average difference in yield between the two ratings? 75 basis points. More to come as the markets come back this week!