It was a Friday evening in August 2011. Financial professionals were kept awake after Standard & Poor’s (S&P) announced that the US debt rating had been downgraded from AAA to AA+. The news sent shockwaves across the world, and those vibrations were felt even more the following Monday, which left the market down more than 6% by the end of the day. Still, this market decline was benign compared to the individual hits suffered by some stocks.
China was next on the chopping block. On Wednesday, May 24, 2017, ratings agency Moody’s downgraded the country’s credit rating as growth slowed and debt rose. So why do people care and what do these ratings mean?
Key points to remember
- The AAA rating from S&P is the highest rating assigned to a debt issuer and is the same as the Aaa rating assigned by Moody’s.
- AAA ratings are assigned to higher quality debt securities that have a high level of creditworthiness and the strongest ability to repay investors.
- The AA+ rating is assigned by S&P and is similar to the Aa1 rating assigned by Moody’s.
- It comes with very low credit risk and indicates that the issuer has strong repayment capacity.
S&P Ratings
Standard & Poor’s rates country and corporate debt based on letter grades. The company creates its ratings based on information such as annual reports, news articles, and company management. S&P analysts determine the financial condition of the company or country and other determining factors.
The ratings assigned by the company range from A to D with pluses and minuses to indicate the likelihood of a borrower repaying their debt. Higher grades come with triple letters, and grades that come with a plus are better than those with a minus.
What does AAA mean?
S&P’s AAA rating is the highest that can be assigned to a debt issuer. It is identical to the Aaa rating issued by Moody’s. This rating is assigned to investment grade debt securities with high creditworthiness. The highest rated debt issuers have the strongest ability to repay investors. Their strong financial positions give them the lowest risk of default.
The United States had a AAA rating until 2011 when it was downgraded to AA+. In May 2022, only a few countries had the highest AAA rating, including Australia, Canada, Luxembourg and Norway.
What does AA+ mean?
The AA+ rating is assigned by S&P and is similar to the Aa1 rating assigned by Moody’s. This rating is high quality and falls below AAA rating. It comes with very low credit risk, although long-term risks may affect these investments.
The AA+ rating is considered one of the highest quality debt security classifications. Because they are financially sound, investments rated AA+ have a high probability of repaying their debts, which makes the risk of default very low.
Besides Moody’s and S&P, the other major rating agency is Fitch. These three rating agencies are the “big three” that investors analyze.
In May 2022, the S&P rating for the United States was still AA+ with a stable outlook. The fact that the United States, the largest economy in the world, went from AAA to AA+ for the first time in history was really a big deal. In terms of stature, the downgrade was painful. Moody’s, on the other hand, continued to rate the country with a Aaa rating, also citing a stable outlook.
Does the United States still have a AAA credit rating?
Yes, according to DBRS, Fitch and Moody’s. DBRS has rated the United States at AAA with a stable outlook, Fitch has rated the United States at AAA with a negative outlook, and Moody’s rating for the United States is Aaa with a stable outlook.
What is the credit rating of the United States?
The United States’ credit rating is AAA according to two major credit rating agencies: Fitch and Moody’s. S&P has rated the United States as AA+.
When did the United States lose its AAA credit rating?
The United States was downgraded from AAA to AA+ in August 2011 by S&P. The ratings agency cited the decreasing predictability of policy-making.
The essential
Whether your investment is rated AAA or AA+, the difference doesn’t really seem to matter. The market was upset and emotional, and the result was a day of panic like the end of 2008.
What always counts in this game is evaluation and patience. Sticking to the simple philosophy of buying an asset below its long-term intrinsic value will ultimately lead to satisfying results. It is a philosophy that is indeed simple to understand, but difficult to implement for most investors.