Credit rating agency Standard & Poor's hit the United States with its first-ever credit rating downgrade on Friday, knocking the nation's sterling AAA rating down a level.
The decision is a major financial blow to the U.S., which is already saddled with a $14-trillion debt problem and the fallout from the global financial crisis.
What is a credit rating?
A credit rating is a financial vote of confidence. Countries, much like individuals, are often assigned these ratings to flag their level of risk for investors. These scores are known as "sovereign credit ratings."
How are ratings determined?
Credit rating agencies base their calculations on many factors, including:
- Financial history
- Ability to pay back loans
- Political stability
For instance, when Standard & Poor's downgraded the U.S. credit rating it cited "the gulf between political parties" as one of the reasons for the demotion.
What is Standard & Poor's?
Standard & Poor's is one of the world's most popular rating agencies, along with groups like Fitch and Moody's. A credit agency is tasked with determining an individual or group's credit worthiness, or ability to honour financial commitments.
What happened to the United States?
Standard & Poor's knocked the U.S. credit rating down a level, from the highest rating of "AAA" to "AA+".
The decision came four days after Congress settled on a plan to reduce the nation's debt by more than $2 trillion. However, the agency had been warning of a potential demotion as far back as April.
By downgrading the U.S. credit rating, S&P demonstrated that it isn't confident in Washington's ability to solve the nation's $14-trillion debt problem.
A U.S. credit rating downgrade has never happened before. As one of the world's largest economies, investors worldwide may become more hesitant to trade with the greenback.
What do the letter grades mean?
Rating systems differ between credit rating agencies. S&P uses a letter grade system that ranges from AAA to the low-score of D.
The United States was first assigned the top-shelf AAA rating in 1917, meaning there was great confidence in the U.S.'s ability to honour its financial commitments.
What does this mean for Canada?
The long-term effects of a U.S. downgrade are not yet known. Some economic experts say they believe that businesses south of the border will start migrating to Canada in search of financial stability.
With files from The Associated Press
