Planet Money did a podcast the other day on exactly how the ratings are created. http://www.npr.org/blogs/money/2011/07/26/138721364/the-tues...

TLDL: There's no algorithm. There's no one ratio you can look at. Analysts travel to the country, assess how likely it is to pay its debt, and report back. A few people listen to the evidence then take a vote on the new rating.

And, more importantly, a change in rating from AAA to AA+ doesn't mean anything compared to a sovereign being derated from investment-grade to non-investment-grade.

Derating may be a black eye to the US's status in the world economy, it's hardly the end of anyone investing in Treasury Bills.

[EDIT] That's from the podcast itself. I listened to the whole thing. Downvote the parent if you disagree.

i am by no means at all knowledgeable in finance, but do these credit ratings really have any value?

According to S&P

Spain has AA

Italy has A+

many others have A.

is this really a credit rating, or more about how much faith citizens have in their own country. with all due respect, i find it difficult to believe that the US could have a AAA rating. of course, the earning potential of the US is huge, but its current standing with regards to debt is not so good.

or maybe i dont quite understand how the ratings work?

They do have real value. All central banks and banking regulators use them to determine the quality of the collateral that can be posted.

So, for instance, say you are a big bank that wants to borrow cash overnight at a low-interest rate - you have to put something up as collateral. Various central banks have various instruments for various things, but for the most part they tend to require 'investment grade' securities - which is why Greece has been causing such a kurfuffle because if they have a 'selective default', then the ratings agencies will downgrade to junk status and financial institutions won't be able to use Greek gov't bonds as collateral anymore.

That's an overly simplified case, but that can be extended to any where that requires collateral. Most, if not all, financial institutions swear by those credit ratings.

The rating is only concerned with whether he country will pay back it's debt on terms. Only paying back 99% is a binary default. Italy uses the Euro, which it doesn't own. The US owns the dollar. The Treasury could mint $1B coins today and sell them to the Fed for the cost of the metal.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/...

If it weren’t for this mishegas with the debt ceiling, there would be no doubt that the US would be able to pay its obligations, and even if Congress doesn’t act in time, the 14th Amendment ensures that the bond-holders would be first in line to get paid.

The US is one of the largest economies in the world; its overall tax revenues are low compared with other developed countries; as someone else pointed out, it controls its own money supply; it has enjoyed low inflation for the past thirty years; Americans grumble about our taxes but unlike Argentines and Greeks, we generally pay what we owe.

What it really represents is to what degree others think a country can pay back it's debts. The US has a higher rating that Spain or Italy because those countries will have a much harder time paying back their debts.

I think alot of people really underestimate the size of the US economy.