The media have been quick to jump on the UK’s loss of their AAA credit rating this week, but what is it and what does it actually mean?
Credit Ratings are issued by independent companies such as ‘Moodys’ or ‘Standard and Poors’, they sell their analysis and intelligence to other companies, investors, banks etc. It is about providing a balanced view of risk.
The main reason given was that it is taking longer than anticipated for the UK economy to start growing, and where there has been growth it is slower than forecast.
A lack of growth means that UK based companies are not recruiting as fast as they could, that profits are generally lower and as such the level of tax the government collects is lower. Less tax revenue means less cash and hence make it more difficult for the UK to finance it’s debt.
Credit ratings for countries are no different than they are for individuals, if you don’t repay your debts the cost of your borrowing will go up, and less people will want to lend to you.
This is an interesting point. In 2011 the USA lost it’s AAA rating, yet the cost of it’s borrowing actually went down. This was due to the fact that it was still seen as a safe bet when compared to other countries.
To put things in perspective, last week only the UK, Germany and Canada (of the industrialised nations) still had a AAA rating. So if you only want to lend to a AAA rated country then your choices are now down to two. Also remember that Germany has issues of it’s own, with Eurozone exposure and elections due later this year.
One of the potentially positive outcomes here is that a weaker pound will make UK exports cheaper and imports more expensive. This may not benefit the consumer but it could benefit UK companies.
What About Everyone Else?
As a guide, the following country and ratings are –
- Japan AA-
- South Korea A
- France AA+
- Spain BBB+
- Portugal BB
- Greece CCC
Think of these ratings as similar to your school reports, A+ better than A, AA better then A+ etc.
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