08 Sep What’s in a Credit Rating?
You may be aware that over the weekend, ratings agency Standard and Poors downgraded America’s credit rating from AAA to AA+.
So, what is a credit rating?
A credit rating evaluates the credit worthiness of a Borrower. Basically, it is a judgment by a Ratings Agency of the likelihood that a Borrower will repay their loans. Everyone who borrows has some sort of credit rating – including Government, Banks, Companies and even individuals.
Countries with the highest Credit Rating (AAA) include Canada, Australia and France. Britain, Japan and now the USA – have a AA+ credit rating. As a point of reference, Greece which we all know is in trouble – has a CC credit rating, meaning that it is unlikely to be able to repay its debts.
Like me, you are probably thinking that a AA+ for America doesn’t sound too bad! (Heck, if one of my kids brought those grades home from school, I wouldn’t have much to complain about!)
To my mind – the downgrade doesn’t tell us anything new. We already knew that America had a bad GFC and debt was transferred from the private sector (banks, companies and individuals) to the Government. The American Government owes a huge amount of money to the rest of the world and over the longer term will have to raise taxes and cut spending to ‘pay the piper’.
However, for financial markets – the downgrade of the USA from AAA to AA+ is significant because it has never happened before. This creates uncertainty and sharemarkets hate uncertainty – so will fall in the short-term and remain highly volatile until the so-called ‘Experts’ work out what it all means. Once this happens, the markets will bounce significantly.
Reuben Zelwer B.Acc, FFin,CFP
Adapt Wealth Management Pty Ltd
About Reuben Zelwer
Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community.