Credit Rating

A credit rating is an assessment of how reliably a company or country can repay what it borrows, expressed as a grade. Agencies such as Moody's, S&P and Fitch assign them on a scale running from AAA down to D.

BBB- and above is investment grade; below that is speculative. Speculative-grade bonds pay more interest precisely because they are more likely to default, which is why they are called high-yield or junk bonds.

A downgrade forces the issuer to borrow at higher rates. Institutions such as pension funds that may only hold investment grade are compelled to sell, pushing bond prices down. The downgrade itself does real damage.

Ratings should not be trusted blindly, though. In the 2008 crisis, large volumes of AAA-rated products failed. A rating is a reference point, not a guarantee. This is separate from an individual's credit score. Credit ratings assess companies and countries; individuals are scored under a different system entirely.