What the hell does ‘junk’ status mean and should we be worried about it?
I keep hearing about triple A credit ratings and junk statuses so what does it all mean?
Triple ‘A’ ratings and junk status are some of terms used to refer to government’s and corporation’s credit worthiness. It’s a guide for investors who may be considering buying bonds in those entities.
Woah there; what’s a bond?
In the finance world a bond is effectively a loan or an instrument of indebtedness to give it its proper name. It’s a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest and/or to repay the full amount at a later date.
So a loan then?
Basically, yeah.
Who gives out the ratings?
Credit rating agencies issue credit statuses, you’ve probably heard of them on the news. Standard and Poor’s and Moody’s are two of the better known names.
My local shop is called Moody’s and for a while I was wondering what he was doing handing out credit status.
No nothing to do with him, Moody’s and Standard and Poor’s are the most recognised credit rating agencies. There’s also Fitch and a few other agencies.
So what are the grades?
They differ from agency to agency but in general they follow a similar line. Standard and Poor’s highest rating is AAA while anything below B rating is considered ‘junk’ status or not investable. Each institute has their own system but all follow similar structures. The higher the better is the key.
So how are we doing?
Well in July Moody’s downgraded Ireland to junk status.
That sounds really bad
Well, it’s not great; investors won’t exactly be encouraged to invest in us with that attached beside our name.
Does that cause problems?
Yeah, the longer we can’t get money from the markets the longer we have to rely on bailouts, which in turn means we have to sign up to austerity measures, as that’s the price you have to pay for being bailed out by the Troika
Those bas****S
Yep, although if they didn’t bail us out we would be even more screwed.
Is that possible?
Sure is, take a gander at Greece!
So how do they come up with these ratings, do they just pick them out of the sky?
Sadly not or we could try and use our Irish charm. They look at the state of the economy, the bank system, projected growth, government stability, unemployment and other criteria.
So are we finished then?
Well the government will argue that we have to make all these cuts to balance the books so we can improve our credit ratings, get back to the markets and step away from the Troika.
How long will that take?
Well we did tip our toe back into the markets recently and it went well so that’s good but we’re far from back yet. We’re still heavily indebted to our European friends but there are some positive signs that we can get back into the game this year or hopefully next but don’t hold your breath – seriously don’t.
