Fitch downgrades US credit rating: What are these ratings and their types? How do they impact economy?

Fitch Ratings is in the news after the American credit rating agency downgraded the United States government’s credit rating, citing rising debt at the federal, state, and local levels and a “steady deterioration in standards of governance” over the past two decades. It’s only the second time in US history that its credit rating has been cut. The rating was cut Tuesday one notch to AA+ from AAA, the highest possible rating. The new rating is still well into investment grade. Let’s understand the Fitch ratings and how they affect a nation’s economy.

What do Fitch ratings mean?

Fitch Ratings provides an overall outlook on the health of the economy of a nation. It’s ratings are forward-looking credit opinions on investments and it examines the likelihood of default. Fitch ratings are used by investors, intermediaries like investment banks, issuers of debt and businesses and corporations. The high Fitch ratings tell wide opportunity of investment and the possibility of growth in a country.

What Fitch downgrade means

Fitch downgrade (a lower credit rating) over time, could raise borrowing costs for the government. No nation wants to have a lower Fitch rating. It creates hurdles in getting investment and loans for big projects. “The rating process usually begins when an issuer, sponsor/arranger or underwriter (or, in any of these cases, its agent) contacts a member of Fitch’s Business and Relationship Management (BRM) group with a request to engage Fitch to provide a credit rating,” reads Fitch’s website.

Fitch Ratings are assessed?

There are some indicators- AAA, AA, BBB etc to categorise an economy of a nation. For example, India Fitch rating is  ‘BBB-‘ which means a stable outlook, citing robust growth and resilient external finances.

On investment scale

Fitch Ratings’ long-term credit ratings are assigned on an alphabetic scale from ‘AAA’ to ‘D’.  Like rating agency S&P, Fitch also uses intermediate +/− modifiers for each category between AA and CCC. It can be classified as AA+, AA, AA−, A+, A, A−, BBB+, BBB, BBB−, etc.

Ratings and their meaning 

• AAA: It indicates that the economy is doing very well and it is reliable and stable.
• AA: A bit higher risk than AAA
• A: Changing economic situation can affect finance of respective nation.
• BBB: Medium-class companies, which are satisfactory at the moment.

Non-investment grade

• BB: It says that the economy is not stable and it is more prone to changes.
• B: Investor needs to stay alert as the financial situation varies noticeably in a country.
• CCC: It means the economy of a nation is currently vulnerable and dependent on favourable economic conditions to meet its commitments.
• CC: The economy with this rating is highly vulnerable and very speculative bonds.
• C: It is not a desire able rating for any nation and it indicates that the economy is highly vulnerable, perhaps in bankruptcy or in arrears, but still continuing to pay out on obligations
• D: This rating has defaulted on obligations, and the economy generally defaults on most or all obligations.

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