Recently, Moody's downgrade of the US sovereign credit rating has drawn widespread attention.
However, many may still be unclear:
What does sovereign credit rating actually mean?
Who evaluates? What are the different ratings?
What are the practical impacts of a rating downgrade?
Where do different countries stand?
This article will take you from the basics to examples to understand the logic and real impact behind sovereign ratings at once.
I. Rating Agencies
There are three major credit rating agencies in the world, namely:
(1) Moody's
(2) S&P Global Ratings
(3) Fitch Ratings
II. What are the main ratings and what do they mean?
(1) Investment Grade
(2) Speculative Grade
III. The actual impact of sovereign credit ratings
(1) Changes in financing costs: A downgrade in ratings usually leads to an increase in the interest rates for bonds issued by the country, raising financing costs;
(2) Fluctuations in investor confidence: Rating changes can affect investors' information about the country's economy, potentially triggering capital outflows or market volatility.
(3) Impact on currency value: A downgrade in ratings may lead to depreciation of the national currency, affecting import costs and inflation levels;
(4) Linkage to corporate credit ratings: A downgrade in the national rating may trigger a chain adjustment to the credit ratings of domestic enterprises, affecting corporate financing;
(5) Pressure for policy adjustments: In response to a downgrade in ratings, the government may be forced to adjust fiscal and monetary policies to restore confidence;
IV. Current sovereign credit ratings of major countries (as of May 2025)
* The meaning of rating 'outlook':
(1) Stable: Indicates that the rating is unlikely to change in the short term.
(2) Negative: Indicates a potential downgrade in the future;
V. Countries with the lowest ratings
VI. Summary
National sovereign credit ratings are very important, affecting not only the interest rates at which governments borrow, but also the entire economic environment of the country.
Although the downgrade of the US has sparked much discussion, from the perspective of the rating itself, the credit of the US remains very high. What we should really pay attention to is not how much it has been downgraded this time, but that it is on a downward trend.
Ratings can be downgraded, and once confidence collapses, it is not so easy to recover.
