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.

TUTORIAL: Bond Basics: Characteristics

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.

Related Articles
  1. Professionals

    Credit Risk Analyst: Job Description and Average Salary

    Learn what credit risk analysts do every day and how much money they make on average, and identify the skills and education needed for this career.
  2. Credit & Loans

    Have Bad Credit? 6 Ways to a Personal Loan Anyway

    It'll cost you more, but borrowing is definitely doable. Here's how to proceed.
  3. Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

    Don't be fooled by the name - junk bonds may be for you if you know how to analyze them.
  4. Personal Finance

    What Happens To Your Student Debt If You Die?

    What happens to student debt when you die? It all depends on the lending agency.
  5. Credit & Loans

    How ‘Real’ Is Your Free Score From Credit Karma?

    A free credit score sounds good, but is it worth giving up your personal information to get one online?
  6. Bonds & Fixed Income

    The Issuance Procedure of Corporate High-yield Bonds

    Issuing debt over equity can have several advantages for companies. Here we have a detailed look on the issuance procedure of corporate high-yield bonds.
  7. Markets

    The Return of CDOs After the 2008 Financial Crisis

    Learn how the market for CDOs is coming back after the 2008 financial crisis, and understand how the market for these products has changed.
  8. Bonds & Fixed Income

    An Assessment of High Yield Corporate Bond Credit Spreads

    A credit risk literature review.
  9. Budgeting

    Key Questions to Ask Before Moving in Together

    Moving in together is a big step. Here are some key financial questions to ask your partner before you make the move.
  10. Stock Analysis

    The Biggest Risks of Investing in Berkshire Hathaway Stock

    Learn about the risks of investing in Berkshire Hathaway. Understand how issues of succession, credit downgrade risk and increased regulation could hurt it.
  1. How many free credit reports can you get per year?

    Individuals with valid Social Security numbers are permitted to receive up to three credit reports every 12 months rather ... Read Full Answer >>
  2. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>
  3. How can I use the funds from operations to total debt ratio to assess risk?

    The funds from operations (FFO) to total debt ratio is used in fundamental analysis to determine a company's financial risk. ... Read Full Answer >>
  4. How stable are municipal bonds?

    Stability is relative in the municipal bond market. Municipal bonds tend to be safer than many other types of investments, ... Read Full Answer >>
  5. Where can I find information about corporate bond issues?

    Information about new and existing corporate bond issues is published regularly in financial newspapers, such as The Wall ... Read Full Answer >>
  6. Why are high yield bonds typically lower rated bonds?

    The term "high-yield bond" is a bit of a misnomer. It is not the case that high-yield bonds tend to be lower-rated; instead, ... Read Full Answer >>

You May Also Like

Trading Center