Moody´s, Fitch, S&P and the ratings they award sovereign debt

Following on from Richard and Geoff´s recent posts regarding the inclusion of manageable public sector finances as a major macroeconomic objective, government´s are therefore reliant on the ratings awarded to them by the three ratings agencies - Moody’s, Standard and Poor’s and Fitch.

Depending on the state of a government´s finances and it´s ability to finance its debt, a government may be awarded AAA (Fitch, S&P) or Aaa (Moody´s) if there is no fear of default and its debt is regarded as “maximum quality”, down to the lowest rating Ca from Moody´s for “little possibility of payment”. The higher the rating, the less risky the investment and therefore the cheaper it is for government to finance its debt. The graphic below and found here nicely illustrates the possible ratings each agency awards goverment debt and looks at the current ratings awarded to various countries. The article is from ABC, a Spanish newspaper, and is titled “Moody´s double standards” in reference to Spain´s recent downgrade by Moody’s from Aa1 to Aa2 with a negative outlook. This is bad news for Spain as it now means they will have to offer a higher interest rate or yield if they are to make buying their debt worth the added risk. The article then discusses the fairness of Spain and Portugal´s downgrade when the UK and US maintain their maximum rating despite having worse debt to GDP ratios.