FAQs: Becoming a credit rating comeback kid
S&P's drops the triple-As, but U.S. can look to Canada for turnaround tips
On Friday, Standard & Poor's cut the long-term credit rating for the United States by one notch to AA-plus, down from triple-A, which deepened investor fears about a weakening U.S. economy.
It was the first time the U.S. credit rating has been lowered since the country won top ranking in 1917.
What is Standard & Poor's?
Standard & Poor's is a financial research and credit rating agency that, along with its two main rivals, Moody's Investor Services and Fitch Ratings, assesses the probability of borrowers — including sovereign nations such as Canada and the United States — paying back the money they owe.
The ratings S&P gives to borrowers ranges from the top-tier triple-A status, indicating reliable, stable entities, to non-investment grade ratings ranging from BB to D.
The rating system is similar to a personal credit score, which is lowered when people get behind on their bills and their credit card debt keeps climbing, said Craig Alexander, chief economist at TD Economics.
"The only difference is instead of a credit score, you have a letter rating of triple-A down to D, which is default," Alexander told CBC News.
Why did S&P do that? Is the U.S. not going to pay back its debts?
The move to downgrade the U.S. to AA-plus, while largely symbolic, sends a powerful signal to investors that the U.S. economy is not faring so well, rather than suggesting America won't eventually pay its bills. In fact, the recent market sell-off saw billions of dollars being switched into long-term U.S. bonds — the very instruments that saw their rating lowered on Friday — because investors consider them to be so safe.
What does the U.S. credit downgrade mean for Canada?Jim Armour of Summa Strategies, NDP activist Rebecca Blaikie and Rob Silver of Crestview Strategy are in The War Room. Listen to the Power & Politics podcast.
"No one would ever say that the U.S. is facing a debt wall where they don't have the capacity to pay," said Mario Seccareccia, an economics professor at the University of Ottawa.
Unlike Greece, which as a European Union member nation has no central bank or sovereign currency of its own, the United States can simply print more money.
"They can always pay anybody with the stroke of a pen," Seccareccia said.
But the question remains: does the United States have the political will to limit spending, reduce budget deficits and pay down its debt?
S&P said it made its decision to downgrade the U.S. rating because it lacks confidence that the country's political leaders will make the choices needed to avert a long-term fiscal crisis.
The move came despite the recent deal reached by President Barack Obama and Congress to avert a default on the government's loans and reduce spending after weeks of bickering in Washington.
"It's a bit silly in the sense the downgrade's not for purely economic reasons but the bad behaviour of America's political elite," Seccareccia said.
The two other principal ratings agencies, Moody's and Fitch, kept the U.S. at the triple-A grade but warned its continued rising debt level was not consistent with holding the top ranking. Moody's also issued a "negative" outlook on the U.S.
Canada, Australia and Sweden have suffered similar downgrades and recovered to reclaim the coveted triple-A rating, but not without steering through some tough years and making equally tough decisions on spending.
The countries join Austria, Denmark, Finland, France, Germany, Netherlands, Norway, Singapore, Switzerland and the United Kingdom as the world's major triple-A nations.
Other countries, such as Iceland and Ireland, saw their triple-A ratings evaporate as their economies suffered near-death blows during the 2008 financial crisis and show no signs of returning to top-tier status soon, if ever.
TD's Alexander acknowledges the U.S. government has some big problems, but if it buckles down, gets its economic and political houses in order, it faces little risk of an economic relapse or a further decline in its credit rating.
Are the ratings agencies always right?
The ratings agencies all have a built-in conflict of interest, as they charge fees from the very companies they rate.
"These are the same people who said these toxic assets were triple-A," Seccareccia said of the ratings agencies.
Subprime mortgages were big business for U.S. financial institutions, but a spike in loan delinquencies and foreclosures devastated the U.S. economy, ruining many big banks and other lending institutions. The U.S. crisis rippled worldwide, which required a massive multi-national bailout and stimulus spending campaign to stabilize the global economy.
On Saturday, a day after S&P's downgrade of the U.S., senior Obama administration figures immediately sparred with the firm over its calculations.
John Bellows, assistant secretary for economic policy at the U.S. Treasury, said in a post on the department's blog that, due to an analytical mixup, S&P's had made a "$2-trillion mistake [that] led to a very misleading picture of debt sustainability" in its 10-year projections of U.S. government debt.
S&P's revised its figures but insisted the new numbers would have no impact on its decision to downgrade the U.S. The credit rating agency soon found itself assailed by none other than American billionaire investor Warren Buffett, who said the U.S. deserved a "quadruple-A" rating.
Sherry Cooper, chief economist for the Bank of Montreal, suggests S&P is now erring on the side of caution, rather than get caught with egg on its face again after the 2008 debacle.
How did Canada and Australia get their 'A'-game back?
Canada waited almost a decade to regain its triple-A status after being downgraded, while it took Australia 17 years and six consecutive surplus budgets.
The early 1990s saw Canada spending more than it took in — racking up annual deficits as it had done for the better part of two decades. The country's debt-to-GDP ratio was soaring and high interest rates compounded the problem.
In 1993, the Canadian Bond Rating Service downgraded Canada's crediting rating from triple-A to AA-plus. Two years later, international ratings agencies followed suit.
Then-finance minister Paul Martin set a course of debt reduction by introducing a tough budget that cut transfer payments and spending on social programs.
By 1999, Canada had eliminated its $42-billion deficit through the series of deep spending cuts and a robust economy — finally winning back an S&P triple-A rating in 2002.
Though the federal deficit has now climbed back to $55.6 billion as a result of a record economic stimulus package, no agencies have threatened to cut Canada's credit rating yet.
Australia had its triple-A credit rating downgraded twice in the late 1980s, spurring the country's government to cut spending, deliver budget surpluses and repay its ballooning debt.
Australia's economic rejuvenation received considerable help from large demand for its natural resources in China. S&P finally returned Australia to a triple-A rating in 2003.