Have you ever heard grown-ups talking about money, debts, and ratings? Well, sometimes even countries get ratings, just like how you get grades at school.
Something interesting happened recently – the United States, the big country you might live in or have heard about, had its rating changed. Let’s find out what happened and what it means!
Big Change for the United States
Imagine if your school gave your class a report card, and it suddenly changed from an “A+” to an “A.” That’s sort of what happened to the United States’ report card, but it’s not about school, it’s about money.
On Tuesday, August 1st, Fitch, a rating agency, decided to change the rating from AAA to AA+. This means that the US government is one level less reliable in the opinion of Fitch. AAA is the highest possible rating for a country. AA+ is one level below.
Why the Change?
Fitch had indicated in May that they might change the rating.
In a statement, Fitch has said:
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,”
There are a few reasons why this change happened. The group that made the change said that they’re a bit worried about the United States’ money management. They think that the country might not handle its money as well as before, and that’s why they gave a slightly lower rating.
Debt and Spending
Imagine you have a piggy bank where you save your allowance. Countries also have their own “piggy banks” to manage money, but they’re much bigger! The United States has been spending a lot of money and borrowing, kind of like taking loans. The group that changed the rating thinks this could be a problem if not managed carefully. We have covered the debt ceiling issue of the United States here.
Political Arguments
Have you seen grown-ups arguing about things? Well, sometimes politicians in the United States argued a lot about money matters, like how much money the country can borrow. These arguments made the experts worried because they want everyone to agree and make good decisions about the money.
What Does It Mean for You?
So, does this rating change affect you directly? Not really!
But it does mean that the US government might have to pay a higher interest to borrow money.
Is this the first time?
No. In 2011, Standard and Poor’s had also changed the rating of the US government from AAA to AA+. That was also the result of a long-standing fight on debt management by the US.
At that time, the downgrade was the first ever. It was announced on a Friday afternoon, so when the stock markets opened on Monday, the stocks fell.
How did the markets react this time?
This time, the dollar has not dropped in value against other key currencies.
The stock market also has not reacted badly so far.
Janet Yellen, the US treasury secretary (Finance Minister), in a statement, said that the rating change was “arbitrary and based on outdated data”.
The White House also said that it “strongly disagrees with this decision.”