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Should Alberta residents be concerned by the recent downgrading of Alberta’s credit rating from AAA to AA+? What is a credit rating and how should we view this change in status?

With the development of capital markets in the U.S. in the late 1800s and early 1900s, financial statistics on fixed income securities came to be compiled for investors for railroad bonds and stocks. John Fitch developed a ratings system in 1924 (AAA to D) that provided investors a snapshot opinion on an organization’s ability to pay its debts. Moody’s and Standard & Poor’s also trace their origins to this time. The development of this business model is just another step in the division of labour in the financial services sector where investment analysts use information from borrowers and other sources to form judgments about the credit-worthiness of the borrower.

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Credit analysts study a variety of ratios that create a picture of the reliability of the cash flows to the borrower that will secure repayment to the investors. While rating a corporation can be highly complex, especially large multinational organizations with many lines of business, judgments about a governments’ ability to repay are even more difficult. The difficulty does not derive from determining cash flows: Most western governments, at both the national and sub-national levels, produce annual budgets and financial statements audited by an independent officer of the legislature. The complexity of rendering an opinion comes from judgments about how the government will manage to leave enough money available to pay its creditors.