Down grade rating 1

This article will focus on the recent topic of downgrading US and European countries sovereign credit rating in 2011 and anaylse the consequences of downgrading of sovereign rate on its domestic and international markets.

A issuer/ borrower with a high credit rating can raise capital at a lower cost than a borrower with a low credit rating, because investors who take on risk expect to be compensated with higher rates of return/interest rates on the risky investments.
However the credit rating scores are just the opinions about relative credit risk not investment advices such as buy, hold or sell. They are just one factor investors may consider in making investment decisions. Besides, the credit rating scores are not indications of the market liquidity of a debt security or its prices in the secondary market, thus it cannot guarantees of credit quality or its future credit risk.


Consequence of downgrade sovereign credit rate to national and globally

On 5th August 2011, Standard and Pool’s lowered its long term sovereign credit rating on united states of America to AA+ from AAA and affirmed short term rating of A-1+.
S&P said the reasons for downgrading are because S&P concerns about the government's budget deficits and rising debt burden. And they believe the prolonged debate on raising the statutory debt ceiling and on fiscal policy about the progress in public spending on reaching an agreement on raising revenues is less likely than they previously assumed and will remain a volatile progress.  
S&P also said that the downgrade is most likely due to political reasons. Economically, the US government is still able to borrow money easily to pay off its bondholders, because nations, particularly American's big creditors such as China, are not likely to stop buying U.S. bonds. Even during the most recent financial crisis, the US continued to be the safest destination for foreign investments.
The effects on domestic market
Government related enterprises
‘A number of entities that are key players in the U.S. financial system -- including mortgage finance companies Fannie Mae and Freddie Mac, and securities clearinghouses like the Options Clearing Corp Depository Trust Co -- are likely to be downgraded by Standard & Poor's on Monday’, reported by Reuters. In fact, S&P lowered the rating on a number of entities and debt issues whose credit quality is directly or indirectly linked to or heavily dependent on US sovereign rating. For Fannie Mae and Freddie Mac, losing their triple-A rating could lift borrowing costs, potentially making mortgages more expensive for consumers and adding to stress in the already unstable U.S. housing market.
Banks and insurers
There is no immediate or direct effect on rating of US banks and insurers. This is because banks’ rating are rarely higher than sovereign and no US banks were rated at AAA or AA+. The same reason to US insurers.

The effects on domestic market are not only the above mentioned. It also affects the derivatives markets and non-financial corporate borrowers which will be explained in later articles.