In May, Moody\u2019s downgraded the U.S. credit rating from the top Aaa to Aa1. This move by one of the major credit rating agencies\u2014S&P and Fitch are the other two\u2014raised the question: Does a downgrade matter?<\/p>\n
First, what is a rating?<\/strong> A credit rating assesses a borrower\u2019s ability and willingness to repay debt. Unlike personal credit scores, which typically range from 300 to 900, government credit ratings are expressed as letter grades, with AAA representing the highest quality and lowest risk. A downgrade implies an increasing likelihood that a government may default on its bonds.<\/p>\n Why does this matter?<\/strong> A downgrade generally means investors demand higher interest rates to compensate for added risk. Higher interest payments raise the cost of government borrowing. To sustain spending, more bonds must be issued\u2014further increasing the debt burden. In the U.S., interest payments have become the second-largest federal expense, surpassing defence spending in 2024.<\/p>\n While credit downgrades can shake investor confidence, equity markets had a muted response, briefly jittering. This was partly because the move wasn\u2019t a surprise, lagging similar downgrades by Fitch in 2023 and S&P in 2011. However, bond prices have come under pressure, sending yields higher, with the 30-year rate surpassing 5 percent in May. It comes at a time when a Republican tax bill rekindled debate about the sustainability of the U.S. deficit and spending.<\/p>\n There are likely to be ripple effects. A surge in U.S. mortgage rates may dampen consumer spending. Credit card and auto loan rates are less likely to be affected, as they tend to follow the federal funds rate more directly.<\/p>\n Why is this significant for Canada? <\/strong>Canada is among the few nations still holding the top credit rating from at least two major agencies. Fitch downgraded Canada in 2020 due to pandemic-related spending. While Canada\u2019s credit outlook remains stable, a downgrade would be unwelcome. Net debt is not out of step with other AAA-rated economies, but gross debt levels are high, and rising interest rates would raise debt-servicing costs\u2014straining future budgets. The heightened focus on global debt may help explain why Prime Minister Carney has opted to delay the release of the federal budget, usually delivered in the spring. Credit agencies continue to evaluate sovereign debt positions, and the U.S. downgrade follows a move by Moody\u2019s to downgrade France at the end of 2024.<\/p>\n","protected":false},"excerpt":{"rendered":" In May, Moody\u2019s downgraded the U.S. credit rating from the top Aaa to Aa1. This move by one of the major credit rating agencies\u2014S&P and Fitch are the other two\u2014raised the question: Does a downgrade matter? First, what is a rating? A credit rating assesses a borrower\u2019s ability and willingness to repay debt. Unlike personal […]<\/p>\n","protected":false},"author":129,"featured_media":3388,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_oasis_is_in_workflow":0,"_oasis_original":0,"_oasis_task_priority":"","_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-3387","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"acf":[],"yoast_head":"\n