What a Negative Rating from Standard & Poor's Really Means

Earlier this morning, Standard & Poor's revealed that they had revised its outlook on the long-term credit rating of the United States to negative.

Standard & Poor's is one of the big three credit rating agencies, along with Moody's and Fitch Ratings. It is widely expected that both Moody's and Fitch Ratings will assign negative outlooks to the long-term debt of the United States as well in the coming weeks.

So what does a "negative" rating outlook mean?

In short, a "negative" rating outlook means that the S&P could lower the credit rating of the United States sometime over the near-term (six months to two years).

Standard & Poor's logoIt's basically a warning - S&P is saying to the United States, "Look, you have some issues that could cost you your current credit rating if they continue to go unresolved."

Standard & Poor's is worried about the large deficits that the United States is currently posting, and they are also worried that lawmakers won't be able to come to a consensus on how to tackle the problem of out-of-control deficit spending. A "negative" credit outlook is a warning to the United States to get their house in order, or else.

Standard & Poor's currently has a AAA credit rating assigned to the United States, which is the best possible rating that a country can have. A AAA credit rating means that the United States has an extremely strong capacity to meet their financial commitments.

The United States, according to S&P, is now at risk of losing this pristine rating. The next rating down on the scale is AA, which means "very strong capacity to meet financial commitments".

Why does the credit rating of a country matter? Well, the higher the credit rating, the more creditworthy that a country is deemed to be. The more creditworthy that a country is deemed to be, the less that they will pay in interest (as they are viewed as being of a lower risk compared to a country with an inferior credit rating). If the United States loses its AAA credit rating, then it will have to pay more to service its mountainous pile of debt, which would be disastrous for the country.

On top of all of that, it would be extremely embarrassing for the United States to lose its AAA rating.