What it is
Credit rating agencies, such as Standard & Poor's, Moody's, and Fitch Ratings, assign ratings to debt instruments and borrowers, including corporations and sovereign governments. A downgrade indicates that the agency believes the borrower's financial health has deteriorated, making it riskier to lend to them. This reassessment can be triggered by various factors, including declining revenues, increased debt, or a weakening economic outlook for the issuer.
A credit rating downgrade often leads to higher borrowing costs for the downgraded entity, as investors demand a greater yield to compensate for the increased risk. For existing bonds, a downgrade typically causes their market price to fall. This can impact sovereign debt, making it more expensive for governments to finance their operations, or corporate debt, affecting a company's ability to raise capital. Markets react quickly to such announcements, reflecting the change in perceived risk.
Why it matters
A credit rating downgrade signals increased risk for a company or government, potentially leading to lower bond prices and higher borrowing costs across the economy.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice