Sovereign Debt Levels and S&P Ratings

debtandsandpThe U.S. debt to GDP ratio moved over 100% with this week’s borrowing following the increase in the debt ceiling. Friday’s move by Standard and Poor’s to lower the U.S. long-term rating to AA+ from AAA was based on a number of criteria in addition to the level of debt, though that has dominated recent political debate.

The chart above shows the sovereign debt levels of countries rated by S&P for which debt levels as a percent of GDP are available from the International Monetary Fund (106 countries) or the CIA World Factbook (10 additional countries).

The most immediate and useful result is that there is very little relationship between S&P rating and the median debt level in each rating group. If debt were the primary element of the ratings, we would expect to see the red median markers move up from left to right. In fact there is almost no systematic pattern in the medians across groups.

S&P has a complex methodology for determining ratings best left to them to describe here.  My point is simply that political debate about the debt level should understand there is very little direct relationship between debt levels and S&P ratings.

One might, however, note where the U.S. debt levels stand among other countries. Whether this is a matter of concern or not probably depends on both your politics and your economics.

The IMF data are here and the CIA data are here. The two estimates correlate at the .96 level, so I’ve used CIA estimates from 2010 for the 10 cases missing from the IMF’s 2011 estimates.