Recent news stories from around the globe would have you feel the sky is falling. U.S. U.S.
What are credit ratings?
In its most simple form, credit ratings are opinions about credit risk. The Standard & Poor’s ratings illustrate the company’s opinion about the ability and willingness of an issuer, such as the government’s in this case, to meet its financial obligations in full and on time. Standard & Poor’s credit ratings are typically expressed in terms of AAA to D.(1)
The credit rating opinions are different from medical opinions provided by doctors in that they are not intended to be a prognosis or recommendation. Instead, they are intended to give investors information about the relative credit risk of issuers and individual debt issues that the agency rates.(1)
With the downgrade the U.S. Australia , Austria , United Kingdom , Switzerland , Germany China is two levels below the U.S. at AA-, while Greece
Why the credit rating was lowered.
According to Standard & Poor’s: “The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
“Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.
“The outlook on the long-term rating is negative. We could lower the long-term rating to AA within the next two years if we see less reduction in spending than agreed to, higher interest rates, or new fiscal pressures, during the period, which result in a higher general government debt trajectory than we currently assume in our base case.”(2)
How credit ratings affect investment decisions.
Standard & Poor’s credit ratings are not the end-all when making investment decisions. Instead, S&P ratings indicate one area, credit quality, and may also address what investors can expect to recover in the event of default. But the ratings are not buy, sell, or hold recommendations.(1) Individual investors may use the ratings when deciding to purchase a municipal or corporate bond from a risk tolerance perspective.(1)
The market has indeed been very volatile and we are keeping a very close eye on it. Rest assured credit ratings are not the absolute measures of default probability.(1) Please call me at 215-886-2122 if you have questions—I am available.
