The As, Bs and Cs

When investing in bonds, the larger banks, fund managers and corporates often conduct their own credit analysis of individual bond issues, but the majority of the huge volume of bond investments are made using CRA ratings for guidance.

The ratings that CRAs give to countries, sovereign ratings, can vary - see Table 5.2. A notch is a one-stage move on the rating scale, e.g. moving from A- to BBB+. The UK lost its AAA rating with some of the CRAs in 2013, due to concern about future financial stability. S&P downgraded the US to AA+ in 2011 after the prolonged political wranglings over the US government debt level, and the Chinese agency, Dagong, caused controversy by downgrading the US rating by several notches, from AAA to A-, in 2013 when the US government could not agree on its financial policy (again, arguments in Congress over the debt ceiling) and came dangerously close to being unable to meet the payments due on its bonds. The Chinese are concerned about the US debt burden as they are the biggest holders of US Treasury securities, at $1.3 trillion:

For a long time the U.S. government maintains its solvency by repaying its old debts through raising new debts, which constantly aggravates the vulnerability of the federal government’s solvency. Hence the government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future.

Dagong Global (http://en.dagongcredit.com)

Table 5.1 Credit rating systems for long-term debt (more than one year)

Source: Data from Rating agencies

Table 5.2 Sovereign ratings

Source: Data from CRAs' websites

When the rating agencies disagree we have a split rating - as you can see, this occurs quite often.