Sovereign debt is money borrowed by national governments, usually by issuing bonds. S&P Global Ratings, Moody’s, and Fitch rate most governments that borrow in international markets, using the same letter scales they use for companies. A sovereign rated BBB‑/Baa3 or higher is investment grade; one rated BB+/Ba1 or lower is speculative grade. This page explains how sovereign ratings work, how they relate to borrowing costs, and what happened in several well-known upgrades and downgrades. For the rating scales in full, see the investment grade guide.
What Is Sovereign Debt?
Governments borrow to fund budget deficits and refinance maturing debt. They can borrow in their own currency, as the United States does with Treasury securities, or in a foreign currency such as US dollars or euros. The difference matters: a government that borrows in its own currency and controls its central bank can always pay in nominal terms, though possibly with inflation, while foreign-currency debt must be repaid with currency the government cannot create. For that reason, agencies often assign separate local-currency and foreign-currency ratings.
How Agencies Rate Governments
Each agency publishes a sovereign methodology. The main factors are broadly similar:
- Economic strength. Income levels, growth, and the size and diversity of the economy.
- Institutional and governance strength. Policy predictability, rule of law, and the track record of meeting obligations.
- Fiscal strength. Government debt and interest costs relative to GDP and revenue, and the trend.
- External position. Reliance on foreign financing, reserves, and the role of the currency.
- Event risk. Exposure to political, banking sector, or geopolitical shocks.
Sovereign ratings also tend to act as a reference point for other issuers in the country. Agencies rarely rate a company above its home government in foreign currency, because a government in distress can impose transfer and convertibility restrictions, though exceptions exist.
Ratings and Borrowing Costs
Lower-rated governments generally pay higher yields, because investors want compensation for default risk. The relationship is not mechanical: markets often price a deterioration before an agency acts, and yields also depend on inflation, central bank policy, and demand for the currency. Crossing below BBB‑/Baa3 can still matter on its own, because some investors and bond indexes are limited to investment grade debt, and a fall to speculative grade can force sales.
The U.S. example: all three agencies now rate the United States one notch below the top. As of October 1, 2026, the 10-year Treasury yielded 5.24%.
| Agency | U.S. rating | Since |
|---|---|---|
| S&P Global Ratings | AA+ | August 5, 2011 |
| Fitch Ratings | AA+ | August 1, 2023 |
| Moody’s Ratings | Aa1 | May 16, 2025 |
Case Studies
| Country | Event | Dates |
|---|---|---|
| Greece | Fell below investment grade | S&P April 27, 2010; Moody’s June 14, 2010; Fitch January 14, 2011 |
| Greece | Returned to investment grade | S&P October 2023; Fitch December 2023; Moody’s March 2025 |
| South Korea | Fell below investment grade in the Asian financial crisis | Late 1997, all three agencies |
| South Korea | Returned to investment grade | Fitch and S&P January 1999; Moody’s February 1999 |
| Brazil | Fell below investment grade | S&P September 9, 2015; Fitch December 16, 2015; Moody’s February 24, 2016 |
Greece
Greece entered the 2010 euro area debt crisis with high government debt and large deficits. S&P and Moody’s cut Greece below investment grade in 2010, and Fitch followed in January 2011. Greece turned to the European Union and the International Monetary Fund for financial assistance in 2010, restructured privately held debt in 2012, and went through a deep and prolonged recession. After years of fiscal adjustment and debt reduction, it regained investment grade ratings from S&P and Fitch in 2023 and from Moody’s in March 2025.
South Korea
During the 1997 Asian financial crisis, South Korea’s ratings were cut below investment grade as its foreign currency reserves ran short. With an IMF-supported program and reforms to its financial and corporate sectors, it regained investment grade ratings in early 1999, and its ratings have since risen well into the investment grade range.
Brazil
Brazil had earned investment grade ratings in 2008. Amid recession, a widening budget deficit, and political turmoil, S&P cut it to speculative grade in September 2015, Fitch in December 2015, and Moody’s in February 2016. The loss of investment grade status coincided with a weaker currency and higher borrowing costs, though those moves reflected the underlying economic and political problems as much as the rating actions themselves.
Spillovers and Criticism
Contagion. Stress in one sovereign can spread to others seen as similar. During the euro area crisis, borrowing costs rose for Portugal, Ireland, Italy, and Spain as well as Greece.
Procyclicality. Critics argue that downgrades during a downturn can raise borrowing costs and force austerity at the worst time, amplifying the cycle. Others argue that agencies often lag the market. Researchers continue to debate how much rating actions themselves move yields, beyond the information markets already have.
Wider effects. A government’s rating can influence the ratings and funding costs of its banks and companies and its access to international capital markets. Claims that ratings also shape diplomatic influence or a country’s voting power in international institutions are not established; the IMF and World Bank, for example, assign voting power through member quotas and shares, not credit ratings.
For more on the agencies themselves, see the role of credit rating agencies and Moody’s investment grade ratings.
Why It Matters for Real Estate Investors
U.S. Treasury yields are the base rate for most dollar borrowing. Mortgage rates and the yields investors require on net lease property are influenced by Treasury yields, along with credit spreads and property-specific factors. The bond-to-NNN spread table compares net lease cap rates with bond index yields.
Frequently Asked Questions
What makes sovereign debt investment grade?
A rating of BBB‑ or higher from S&P or Fitch, or Baa3 or higher from Moody’s. Agencies weigh economic strength, institutions, government finances, external position, and event risk.
When did Greece lose its investment grade rating?
S&P cut Greece below investment grade on April 27, 2010 and Moody’s on June 14, 2010. Fitch followed on January 14, 2011. Greece regained investment grade from S&P in October 2023, Fitch in December 2023, and Moody’s in March 2025.
What is the U.S. credit rating?
AA+ from S&P (since August 2011) and Fitch (since August 2023), and Aa1 from Moody’s (since May 16, 2025).
Do sovereign downgrades always raise borrowing costs?
Not always, and not by a fixed amount. Markets often price in deterioration before an agency acts, and yields also depend on inflation, central bank policy, and demand for the currency. A fall below investment grade can still force sales by investors limited to investment grade debt.
Where can I find current sovereign ratings?
On the rating agencies’ own websites, which publish sovereign rating actions, and in government debt management office investor materials. Ratings change, so check the date of any rating you rely on.
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