What Does It Mean? Austerity to Credit Rating

credit scoreA question we get asked a lot is around terminology, things like ‘what are austerity measures’ or what really is a ‘credit rating’. Well, we have decided to publish a series of blogs covering commonly used terms, and putting them in plain English.

Lets start with A-C, or Austerity to Credit Ratings

Austerity – The policy of central government where the primary objective is to reduce borrowing. Think of it as seeing your large overdraft and then not buying those new Levis, in government terms the new Levis would be transport, housing, public services etc. You may also take on another job to get more money in, or sell what is sitting in the garage. This equates to tax rises and privatisations.

Basis Point – Nothing complicated here. One Basis Point is the same as 0.01%, therefore increasing your costs by 50 basis points is the same as 0.5%. Some people like to make things sound complicated

BRIC – That is Brazil, Russia, India and China. Being the growing world economies, or ‘bricks’ referring to foundation and strength. The flip side to this is PIGS, being Portgual, Ireland, Greece and Spain. Enough said

Commodity Prices – A commodity is a product that is the same regardless of where you buy it from. Think sugar, cotton or bananas. There will often be grades of quality, but there is likely to be a standard price for these goods

Capital Adequacy – Now we are really getting Newsnight rather than Newsround. This applies to banks and measures how much ‘cash’ they have in reserve to absorb bad loan losses. There are guides as to how much they need depending on how good or secure the loans they made are. A bank can improve it’s capital adequacy by taking on more savings, getting more security for it’s loans, selling something or issuing more shares. If a bank is struggling then you could see why improving it’s capital adequacy could be difficult. Would you put your savings in a struggling bank?

Credit Rating – An independent and external agency will issue a credit rating, the score is normally reflected similar to your old school reports, A+ to F, with a AAA beating a AA etc etc. Countries are rated in the same way as you or me, if you are struggling to pay or starting to pay late then expect the rating to fall. The difference here is that rating agencies look at what may happen in the future, which is why countries are downgraded because of what ‘could’ happen

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We hope you found this beneficial, we have tried to take some of the mystique away from media banded terminology. If you have any comments please add them above or contact us via the website.

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