• The highest credit rating is a AAA rating with ‘stable outlook’. A AAA credit rating implies there is no remote chance of default on government debt.
• A negative AAA credit rating implies there is a chance of downgrading the debt to AA.
• A credit rating of BBB- or higher, it is said to be ‘investment grade’. Anything lower than BBB- is said to be a speculative investment with high chance of default.

Countries with Highest Triple AAA Credit Rating

Austria

Public debt ratio was 70.4 percent of GDP. Helped by close ties to Germany, though vulnerable to problems in Eurozone economy

Australia

Public sector debt for 2010 – 22.4 percent of GDP. Has a ‘stable’ outlook at all main rating agencies.

Canada

Public debt at the end of 2010 was 37% GDP (though see Canada National debt for other figures. Despite being tied to fortunes of US economy, high natural resources help export revenue.

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The European debt crisis raises many issues.

Debt Levels Pre Crisis

Public Sector debt as % of GDP

Source: EU Stat

In 2007, just before the financial crisis, European debt levels were relatively low by historical standards. Irish government debt was very low at around 27% of GDP. Spain was around 37% of GDP. UK debt was just over 40% of GDP.

Clearly in the case of Greece, debt was already very high before the onset of the crisis (over 100% of GDP) . This gave them much less room for manoeuvre when tax revenues fell during the recession.

Selected EU debt in 2007

source: Krugman

Note: Deficit is the annual borrowing requirement. See: difference between deficit and debt

Bond Yields on EU Debt

An indication of the debt crisis is a rise in bond yields. Higher bond yields are an indicator that private investors are unwilling to hold those bonds. If you don’t trust a country to repay you, then you don’t want to buy the bonds unless you get a higher bond yield to compensate for the higher risk. Greece has witnessed a rapid rise in bond yields as private investors have largely shunned Greek bonds on fears of the Greek government eventually defaulting.

An interesting fact is that bond yields on UK debt have stayed low. (it is the same in US where bond yields have stayed low) despite similar debt levels to Spain.

You can see more on this contrast in bond yields between Spain and UK here

Italy’s Crisis

See: Italy’s economic problems

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