Explaining how credit rating works

Graeme Wearden -Jul 30, 2011

What are these worth?

What are the origins of the AAA rating?

Rating agencies date back to the first US railways in the 19th century. Investors craved information in the rush to open up the continent. Henry Varnum Poor, whose firm became the credit-rating agency Standard & Poor's (S&P), was an early analyst, publishing studies of the financial health of railroad companies. John Moody launched a similar venture in the early 20th century. Fitch says it was the first agency to create an alphabetical ranking for bond issues by countries, called sovereign debt, and corporations in 1924.

What is special about the AAA rating?

The ''triple A'' rating is the highest possible rating that can be given to a company or country. This gold standard means an AAA-rated borrower can usually secure a loan at lower interest rates, as there is much less risk that the money will not be repaid.

Is AAA a guarantee against a default?

No. There is less chance of an AAA default than a BBB one,

but still a risk.

How many countries are rated AAA?

Because the ratings agencies use different methodologies, there is no single list of AAA-rated sovereign debt. But S&P has AAA ratings on Australia, Austria, Canada, Denmark, Finland, France, Germany, Liechtenstein, Luxembourg, the Netherlands, Norway, Singapore, Sweden, Switzerland, Britain and the US.

Why don't China or Japan get AAA?

Japan lost its AAA rating in 2001, when S&P warned that its weak economic growth and large deficit made it more of a credit risk. It is now only rated as AA-, the fourth-highest rating, by S&P. In practice, the lower rating has little impact, because much of Japan's government debt is bought by its own citizens or corporations. China does not qualify for the AAA rating. S&P says unknowns in the Chinese banking system could knock its growth off course, and assigns it an AA-.

Can a lost triple-A rating be regained?

Yes. In 1994, Moody's stripped Canada of its ''AAA'' rating. Seven years later, after a strict austerity program, it was upgraded to triple-A.

Guardian News & Media

Source: m.smh.com.au

Category: Credit

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