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MARY LOUISE KELLY, host:

This week, the rating agency Standard & Poor's lowered its credit outlook for the U.S. government. It was a warning about the size of the deficit, and the agency said it might downgrade the country's stellar credit rating. Well, that announcement, of course, made headlines around the world. Global stock markets fell.

To talk more about the influence of rating agencies like Standard & Poor's, we've called Jacob Goldstein from NPR's Planet Money team in New York.

Hi, Jacob.

JACOB GOLDSTEIN: Hi.

KELLY: So, let me start by asking: Why does a statement like this from S&P send such jitters through the markets? I mean, it is not as if everyone didn't know the U.S. has a problem with the size of its deficit.

GOLDSTEIN: Yeah. We definitely saw a sharp fall in the stock market after this came out. And certainly, the sort of news narrative we heard was stock markets fall on S&P warning. I don't know exactly why that happened. You know, you could say, well, people were nervous, and this made them more nervous. You could sort of construct a complicated story that says, well, if there were a downgrade, interest rates go up. That would be bad for companies. That would drive stocks down.

But I actually think one really interesting place to look is at the bond market, right? Because bond investors, after all, they're the ones lending money to the U.S. government, right? But if you look at what happened to the bond market after this warning came out, it was almost nothing. There was, essentially, no effect. So at least as far as bond investors are concerned, this warning was no big deal.

KELLY: And why should we pay attention, generally speaking, to pronouncements from S&P or the other rating agencies - the other big two being Moody's and Fitch. I mean, they turned out to be incredibly inaccurate in the financial crisis, lots of mortgage-related bonds that they rated very highly turned into junk. Why trust them?

GOLDSTEIN: That's a great question. They certainly got a black eye in the financial crisis. But despite whatever their performance may have been, the big ratings agencies, they're still written into the laws and the regulations that govern our financial system. So, for example, if rating agencies lower their rating, that can force banks and insurance companies and other big financial firms to sell off that country's bond. So the rating agencies still do matter.

KELLY: You say that their influence is written into the law, but these are not government agencies. How is it, exactly, that they work?

GOLDSTEIN: They're private companies. And when they rate corporate bonds and mortgage bonds, it's actually the companies that they're rating that's paying them. So it is this very strange hybrid, right? On the one hand, they're private. They make a profit. But on the other hand, the law gives them this special position in the financial system.

KELLY: What happens if events that they're warning about come true and the U.S. should come to lose its AAA rating? What would that actually mean?

GOLDSTEIN: That could actually be quite significant. You know, U.S. Treasury debt is widely considered still among the safest investments in the world. Lots of big firms and countries even put their money in treasuries the way you or I would just put our money in the bank. So if they actually did get downgraded, if S&P said, you know what. There are other, safer places to put your money, one simple thing that might happen is the U.S. government would have to spend more money paying interest. Borrowers would demand higher interest rates to lend money to the government.

Another thing that might happen more broadly, you could see other countries assuming a more prominent role in the sort of global financial system, the U.S. kind of fading a little bit and other big countries rising.

KELLY: All right. Jacob, thanks very much.

GOLDSTEIN: Thank you.

KELLY: We've been talking with Jacob Goldstein. He's with NPR's Planet Money team in New York.

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KELLY: You're listening to MORNING EDITION, from NPR News.

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