There are five major agencies that decide a country's credit worthiness: Fitch Ratings, Moody's, Standard & Poor's (S&P), Business Monitor International and CTRISKS. Of these, S&P, Fitch and Moody's are widely known and lead the others in their decisions. In essence, they determine how well a country can pay back its debt.
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Countries With Downgrades
This year, for the first time in its history, the United States had its AAA rating downgraded by S&P. After the downgrade, S&P stated they'd made a mistake, but let it stand. (To know more about U.S. AAA rating, check out: Can The U.S. Regain Its AAA Rating? )
The U.S. is not alone. Within the last year, many countries have received a ratings downgrade, including Italy, which was dropped to an A rating, despite being the third largest economy in Europe. This downgrade, followed closely by Spain's, is raising concerns about the future of the Euro; Greece, Ireland, and Portugal were also downgraded. Unemployment is rising throughout most western economies, stocks are down or stagnant and most countries are sitting on a stifling debt load, all of which have lead to their downgrades.
The Impact of Downgrades
The repercussions of such a downgrade will likely not only affect the United States, but will impact the global economy. The biggest change will be the ability to borrow money. The U.S. could easily borrow with significantly low interest rates, based on its superior rating. In the coming months this might end, meaning the national debt would rise due to higher interest rates, and those rising rates will tumble down to the rates you are charged on the local level.
Increasing interest rates would lead to tighter lending policies and less business expansion, which would mean no new jobs. It also means that international investors would look elsewhere to put their money. The U.S. has always been considered a "safe" investment, however, with the downgrade it may not look so inviting, causing investors to look elsewhere.
The U.S. dollar has been the standard currency of world business. Losing its AAA rating could end that reign and bring another, better managed, currency onto the global trading stage. Italy and Spain's downgrade builds uncertainty against an already struggling Euro. The European Central Bank invested in Italian and Spanish bonds hoping to bolster both economies, and French banks have underwritten Greece's faltering economy. If any of these countries default on their loans it could cause widespread global panic. (To know more about impact of downgrades, read: The S&P Downgrade: What Does It Mean? )
Countries With the Best Ratings
There are a few bright notes amid all these downgrades. Several countries are enjoying their AAA ratings and so are investors. Included in the top five are:
Australia – With a low national debt, vast natural resources, low unemployment and a small population, Australia is becoming a haven for investors looking for a "safe" place to trade.
Canada – This quiet U.S. neighbor avoided many of the banking and mortgage problems that the U.S. has endured. Another country with a small population, vast natural resources and a small national debt, it is considered the safest investment in the west.
Denmark – They have one of the world's best educated populations. Denmark has also kept its own currency, not opting into the Euro. While it does have a higher national debt and a dependence on foreign trade, it has managed to remain a stable market.
Germany – With the fifth largest economy in the world, Germany is the Euro. They boast a very skilled workforce, low unemployment and a moderate national debt. After reuniting as a nation, Germany experienced some economic woes. It has kept its AAA rating and despite budget deficits, an aging population and leadership issues, is considered a safe investment.
Holland – Considered to have an excellent and educated workforce, significant high-tech exports and headquarters to many financial institutions, Holland looks to keep it's AAA rating for quite some time.
The Bottom Line
Credit ratings seem to have more impact on the individual than on a nation. While the downgrade seems to have a slight impact on stock market, it doesn't as yet appear to have significantly impacted the U.S. economy or its investors.
Even though the downgrade hasn't been as dire as predicted, the U.S. government should take it as a warning and begin to reduce the national debt. For the individual investor, the U.S. is still a fairly "safe" haven in an uncertain world, but it wouldn't hurt to diversify in some other countries with a AAA rating.