Rich-World Credit Ratings Take a Dive: The Ticker

If the U.S. government fails to get enough of a grip on its long-term finances to keep its AAA credit rating, it will have company. Throughout the developed world, governments' ratings are headed down -- a trend that could become a big problem if and when the next financial crisis hits.

Among the 17 advanced nations Standard & Poor's has tracked consistently for the past couple of decades, credit ratings have fallen off a cliff in recent years. Currently, their average long-term government-debt rating stands at just above AA, compared with  nearly AAA as recently as 2008 (see chart). Of the 34 nations that the International Monetary Fund defines as advanced, 16 have AAA government-debt ratings -- though that could soon be 15 if U.S. lawmakers can't get their act together. Spain and Ireland lost their AAA ratings in 2009. Japan lost its in 2001.

The declining creditworthiness reflects some common afflictions. Like the U.S., many advanced-nation governments are providing their people a level of service and insurance against disasters -- financial and otherwise -- they simply can't afford, at least at the tax rates their people are willing to pay. Research by Kenneth Rogoff of Harvard University and Carmen Reinhart of the Peterson Institute for International Economics has shown that sovereign debts tend to rise particularly sharply in the wake of financial crises, as governments effectively take on debts their banks and citizens can't afford to pay. They estimate the average debt load of advanced-nation governments stood at 74 percent of annual economic output in 2010, about triple the level of the early 1970s.

The governments' largesse has now put them in a position where their own credit problems could prevent them from stepping in to halt the next crisis -- or could actually spark the next crisis, as debt strains in both the U.S. and Europe are already threatening to do. The only way out is to cut services, raise taxes or both. One way or another, living in the advanced world is going to become less comfortable.

At least one country, though, is headed in the opposite direction. Over the past couple decades, China's long-term debt rating has risen from BBB to AA-, three notches away from AAA.

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Credit Rating for Governments

S&P, Bloomberg View Research

Average Credit Rating for Selected North American and European Governments.

Average Credit Rating for Selected North American and European Governments. Source: S&P, Bloomberg View Research