After reducing America's classification .. all you want to know about credit rating agencies

In a move that was not surprising to investors and decision makers, Moody’s reduced the US credit rating last Friday night to ‘AA1’ of ‘AAA’, to deprive the world’s largest economy of the last excellent classification that granted him from the main classification agencies. Moody’s decision, which arose as a result of the inability of successive departments to deal with high debt levels, amid the increase in the cost of the debt service, was issued a few hours after a large committee in the House of Representatives did not accept the major tax law because of concerns about the great cost. This step raises a question about what these agencies are, and how have you gained this power? What are the credit rating agencies? These financial institutions evaluate the ability of governments and companies to pay their debts, and give them classifications that from ‘AAA’ (the highest quality and the lowest level of credit risk) and end at “C” (the lowest classification and often indicate the decline and minimal recovery opportunities). There are many classification agencies in the world, but ‘S&B’, ‘Moody’s’ and ‘Fitch’ are the most prominent in the market. The S&Pobal ratings, founded in 1860, say it offers transparency to markets by providing “independent and high quality opinions on creditworthiness”, according to its website. ‘Fitch’ has been providing credit rating services for countries and businesses since 1923, saying that it is ‘committed to offering value that exceeds the classification, through independent and future credit opinions and research’ according to its website, and ‘world vision is polished with local market experience and transparent information for exporters and investors.’ In terms of ‘Moody’s’, founded in 1909, ‘comprehensive risk visions offer over 15,000 customers in 165 countries’, including 97% of ‘Fortune 100’ businesses, a list of the 100 largest revenue businesses, according to its website. Classification agencies gained their strength through broad recognition of the reports and classifications they issued in the markets, and to rely on them through institutions and investors. How does the reduction of classification countries affect? Traditionally, credit rating agencies have a great power of potential borrowers. To obtain an investment classification or its loss, it can be decisive for any country trying to persuade investors to finance it. Reducing the classification of any country will increase debt costs. The higher the investment risks, investors demand higher returns to lending states. Immediately after the “Moody’s” statement, the funeral contracts of Treasury bonds dropped to their lowest levels, asking revenue on the effects for 10 years to 4.475%. But for the largest economy in the world, it is not clear that lowering the ‘Moody’s’ rating has a major impact. According to John Otorz, the first editor of Market Affairs in Bloomberg, the agency “has an opinion based on general information that many people have known and analyzed in advance”. What does it mean to reduce the credit rating? The reduction of the classification means that the committee consisting of analysts at the agency decided that the lender’s credit status became relatively weaker, and that the possibility of paying debt had withdrawn in time and fully expected what was expected in the past. Classification agencies constantly monitor these standards. The classification can be reduced or increased due to different factors, including the financial situation of the borrower, the conditions of the economy or the sector, or due to certain events that affect the borrower’s ability to pay. Moody’s methodology keeps quantitative and qualitative factors into account to assess the borrower’s ability to fulfill its obligations in time and fully. What are the future prospects? In addition to credit ratings, the most important rating agencies set up future expectations and express their opinion on the potential tendency of credit rating in the medium term. These expectations are divided into four categories: positive, negative, stable and under the review (variable). “Moody’s” said that the future prospects of the United States reflect the balance of risk at the “AA1” level, as the US economy remains unique among the classified countries, thanks to its large scope, the high level of income, strong growth capabilities and the record of innovation that support productivity and growth. How are government bonds classified? These institutions classify the size of the financial strength of the bodies that issue effects, including governments, and give them credit grades that determine their ability to fulfill debt payments. Investors are usually dependent on these credit ratings when deciding to buy bonds, and these classifications can greatly affect the amount of returns paid by the borrowers to raise funds in the capital markets. However, US mortgage returns are low thanks to the demand for both the dollar (global reserve currency) and the US Treasury bonds, which are seen as a global standard of low -risk assets. The US credit rating has developed, the United States has always enjoyed an excellent credit rating that reflects its position as the largest economy in the world, and that the dollar is the global reserve currency. However, things have changed since 2011, and ‘S&B’ has become the first agency to reduce the classification of the United States of ‘AAA’ to ‘AA+’ since it was given in 1941, according to ‘Reuters’. In August 2023, Fitch took a similar step, and the US credit rating of the United States reduced one degree from “AAA” to “AA”. ‘Fitch’ said at the time that the tax cuts and new spending initiatives, along with multiple economic shocks, led to an extensive budget deficit, while medium -term challenges were related to the high cost of rights. Moody’s was the last of the three most important rating agencies that reduced the credit rating of America for the first time since 1949. The United States still has the second highest credit rating. The effects of the classification reduction push the US classification reduction through Moody’s ten -year mortgage, which is the global standard for determining the borrowing costs for government, businesses and consumers, to the highest level since February, which has transferred the levels that President Donald Trump urged in early April to withdraw his strict identification plan. Trump told reporters at the time: “The markets were a little out of control … some tension and some fear,” Trump told reporters at the time. In another indication of the effects of reducing the classification, Treasury effects have been given for 20 years after a poor bid on the effects, which reached the 5%interest rate, which is the highest level, as this term was refuted in 2020. What was made especially Wednesday’s auction is that the 20 -year auctions are usually the most important. The Treasury laid this period for the first time in the 1980s, and these effects do not spread in abundance, as is the case with more general deadlines such as effects for two years or ten years. “I don’t usually write about the Bond auction for 20 years because it looks like a lost child at the debt tool stadium, where many are not involved in this category,” Peter Bokarfar, an independent strategy, wrote in a memo for clients. But even, the poor results of this auction have put pressure on the next week’s auctions, which include effects for two years, five and seven years, which are far more important, and if the results of these auctions are similar, it will only aggravate the idea of ​​selling ‘America’, according to the executive editor in the opinion section in ‘Bloomberg’ Robert Burgis in an article. After America has left the list. Who will carry the excellent classification? With the United States losing the last excellent credit rating (AAA), the number of countries with the highest credit rating dropped through the three major rating agencies to 11 countries, compared to more than 15 countries before the financial crisis in 2007-2008, according to Reuters. The economies of these countries are slightly more than 10% of the global glow. In Europe, Germany, Switzerland and the Netherlands, the largest economies are maintaining the highest credit rating. In other regions of the world, the list includes Canada, Singapore and Australia. On the other hand, the credit rating of the US debt became lower than the credit rating of the small European state Liechtenstein, which has an excellent credit rating (AAA) and the gross domestic product, according to the World Bank, is only about $ 7 billion.