The RP: Credit Downgrade for Dummies

Having received positive feedback — and considerable media attention — from my piece two weeks ago that explained the sometimes esoteric, often confusing subject matter surrounding the debt crisis debate (“Debt Ceiling for Dummies“), I decided today to pen a quick column to help explain in similarly straight-forward terms the import of last night’s decision by S&P to downgrade U.S. credit.

Here’s an excerpt from my latest Huffington Post column, “Credit Downgrade for Dummies“:

Who are the credit rating agencies and what did they just do?

There are three primary national credit rating agencies:  Fitch, Moody’s Investors Service (“Moody’s”), and Standard and Poor’s (“S&P”). These agencies rate the creditworthiness of governments, companies and individual securities, allowing investors to better understand the risk of their investments. The higher the rating, the more creditworthy — or, alternatively, the less risky — the investment.

Our federal government is one of the many entities these agencies rate. The U.S. borrows money — by issuing bonds and Treasury bills to governments, corporations and individual investors — in order to operate all of its essential functions. The outstanding current federal debt currently exceeds $14.5 trillion.

Since the credit rating agencies were established, U.S. Treasuries have always enjoyed a triple A rating, the very highest: indicating to global financial markets that they are among the safest investment instruments in the world. Friday night, however — for the first time in the nation’s history — S&P downgraded the rating of the nation’s long-term debt to AA+, one notch below AAA, meaning that the U.S. has been removed from its list of risk-free borrowers.

Earlier in the week, Moody’s and Fitch both declined to downgrade the country’s credit rating. Moody’s, however, changed its “outlook” on U.S. debt to “negative,” meaning that there is a risk of a future downgrade. Fitch stated it would determine whether to lower its own outlook by the end of the month. Both have urged Congress to make more progress in debt reduction in order to avoid a potential full downgrade.

 

Click here to read my full piece, “Credit Downgrade for Dummies” at The Huffington Post.