BUSINESS

China not the first to have credit rating downgraded

2017-05-25 20:27 GMT+8
Editor Zhang Ruijun

By CGTN’s Owen Fairclough

Moody’s Investor Service has downgraded China’s sovereign credit rating by one notch from Aa3 to A1, but China is not the first country to have its credit-worthiness downgraded. Some of the world's other leading economies have also been stripped of their pristine ratings. 

France and the United States have very different economies, but with one thing in common -- they've both lost their Triple-A credit ratings. And the common thread was debt -- too much of it. 

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Back in 2011, the US Congress couldn't agree on how to stop the country's spiraling debt. That created fears the US would default on its debts and prompted Standard Poor's (S&P), one of the big three ratings agencies, to strip the US of its coveted Triple-A rating. 

France suffered a similar fate the following year. But its former president didn't think it was credible. 

"All of a sudden, a ratings agency, Standard and Poor's, became the absolute reference of all those who previously either ignored or criticized it. From the moment that this agency said something bad about France, for many people, this could only be the truth because it was a criticism of France and possibly of its government," said Nicolas Sarkozy, the former French president. 

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In any case, investors and financial markets sometimes don't care about credit ratings going down, despite a lower credit rating theoretically meaning borrowing costs go up. There was so much confidence in France and the US that their borrowing costs fell after the downgrades. It got cheaper for these countries to get credit, not more expensive. 

However, the credit rating agencies were right over Greece’s credit-worthiness. They knew Greece's credit-worthiness was dire, because of its sky-high debts, and said so months before Greece needed three bailouts to avoid complete economic collapse. 

And ultimately, credit-worthiness is about how much confidence there is in a country's ability to meet its debts. While credit ratings can influence markets, investors tend to make up their own minds.

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