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Credit rating agencies like Moody’s decide the credit rating of the United States. Here’s what you need to know

Credit rating agencies like Moody’s decide the credit rating of the United States.  Here’s what you need to know



Credit rating agencies are once again in the spotlight amid ongoing high-stakes debt ceiling negotiations in Washington.

As Democratic and Republican lawmakers remain deadlocked and the X-date approaches when US Treasury funds run out, there is a growing risk of a US debt rating downgrade.

The so-called big three Moodys Investors Service, S&P and Fitch Ratings wield immense power in determining the creditworthiness of corporations, state governments and even entire nations. The three agencies have signaled they will consider cutting America’s credit rating if lawmakers don’t pass a bill to raise the debt ceiling before it’s too late. In fact, earlier this week, Fitch issued a stark warning, putting the top-rated US credit on negative watch.

Experts say an actual downgrade could shock the global financial system and threaten the US dollar as the world’s reserve currency.

Simply put, rating agencies give their opinion and issue a rating assessing the likelihood of a borrower repaying their debt. Rating agencies first rose to prominence more than a century ago, but today the three major agencies dominate the market.

The United States is one of the countries with the highest debt ratings in the world, holding the best AAA from Fitch and Aaa from Moodys. The United States is rated AA+ by S&P, which downgraded the country in 2011 in another debt ceiling fight in Washington.

According to Lawrence White, professor of economics at New York University’s Stern School of Business, each agency has its own methodology for determining the financial health of companies and countries.

Overall, however, White said the agencies assess a country’s economic track record, including expected revenues, costs and debt payments, to determine a score.

He said only countries that are extremely likely to meet their obligations get a triple-A rating.

Their views are taken very seriously by financial markets, White said of the big three agencies. Entities with lower ratings generally have to pay higher interest rates when borrowing money.

Moodys, S&P and Fitch charge fees to most entities they rate, excluding sovereign nations like the United States, according to Samuel Bonsall, a professor at Penn States Smeal College of Business. Bonsall has studied the effectiveness of credit rating agencies and their potential conflicts of interest.

If I’m a corporation and I want to get a debt rating, I have to pay a fee for that bond rating, Bonsall said.

There is a bit of a pay concern for the game, he added.

Bonsall said the agencies had spent reputation capital over the past decades when they failed to lower ratings before the 2001 Enrons bankruptcy and the 2008 global financial crisis.

Perceptually, I don’t know how much the general population trusts agencies that do a good job, he said.

Still, a U.S. demotion from one of the big three would likely hurt Americans in several ways, Bonsall said.

This is because a downgrade could impact consumers and businesses, damaging the economy all around.

This could lead to a recession sooner than it otherwise would have, he added.

White believes a downgrade could erode the US dollar as the most trusted currency for international trade payments.

Participants in international transactions may begin to say that they weren’t as comfortable denominating everything in dollars. Were not so comfortable holding US bonds. Maybe we should start thinking about the euro as an alternative currency for doing business, he said.




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