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I am coming from a UK perspective; we lost our AAA credit rating in 2013, and dropped again in 2017 after the referendum on European Union membership. It was reported last week that we are set to be downgraded yet again.
How does credit rating of a country affect the common man in the street? Should they be worried about their countries credit rating? What can they do about it?
First of all, what does the credit rating of a country actually mean?
The credit rating of a sovereign country is calculated by privately owned rating agencies using algorithms and formulas they invented themselves. Different rating agencies don't always agree on the rating of every country.
These ratings are supposed to serve as a guideline for investors how likely a government is to default on its debt (refuses to pay back loan installments in a timely manner). This in turn tells investors what interest rate they should expect when they lend money to a government (usually in form of buying government bonds). That means the better the credit rating, the lower the interest rate a government has to pay when it takes on debt. The rating agencies calculate that rating by estimating various factors, for example:
When a government has a large amount of debt and a bad credit rating, then a large part of its tax revenue has to be paid to pay interest on that debt. That money is now no longer available to pay for public expenses.
How does that affect the average woman on the street? The better the credit rating of her government, the more of her taxes go back into government programs like education, police, infrastructure or social security. With a worse credit rating, taxes are instead used to pay off investors who lent money to her government. It doesn't affect her own credit rating in case she wants to take a personal loan (at least not directly).
But note that most of the factors which affect the credit rating of a country also have direct effects on the quality of life of the population of the country. That means a bad credit rating is a secondary indicator that there is a lot of stuff going wrong in a country.
What can the common woman on the street do to improve the credit rating of her country? Not much, except putting politicians in power who care about improving the metrics outlined above, working hard to keep the economy stable and productive and paying her taxes.
For more information on sovereign credit ratings, check out this article.
There are some excellent answers here already but I wanted to put some numbers to give a perspective. The credit rating is closely related to the interest the goverments have to pay on their debt. In the UK, the current interest on 10 year bonds is around 0.75% per year. In Germany, with has a roughly similar economy but apparently more trust from investors, the 10 year interest rate is -0.3%, so about 1% difference.
UK national debt is around 85% of GDP or 1780 billion pounds. We will simplify and just assume the 10 year interest rate on all of it. If the UK were to be able to borrow at German rates, the UK government could spend 18 billion pounds a year less on interest, so they would have that much more to spend on other things. So even relatively small changes in interest rates possibly caused by changes in credit rating can translate into big budget changes for the goverment.
At a first glance, ratings are just the opinions of very specialized news agencies. But ratings affect the actions of creditors, investment funds, etc. Historically, ratings agencies made some big mistakes in the 00s. They also got some things right, and people still listen to the agencies. If the rating gets too low, pension funds might not be allowed to hold the government debt.
How does it affect the people?
If the government has to pay more interest on the national debt, they have less money for other priorities. The currency might drop, too.
Should the people be worried?
Yes, but probably less so than they worry about their personal credit, provided the government doesn't become junk.
What can the people do?
Elect a parliament and government whose policies please the international economic community, notably the rating agencies. This has side effects on the national level, of course.
Credit Rating of a nation does affect the populace in indirect ways.
Credit rating is a direct reflection of a nations ability to repay its creditors. The lesser the rating is, the lesser the nation receives investments (Considering risk free interest rates)
If a nation's credit rating is downgraded, the investors/those planning to invest would reduce their stake, which impacts the investment levels. Which implies less money into real estate, stocks, assets and other areas, which indirectly means, less money flowing to the government in the form of taxes, which impacts their ability to spend. In case of stocks, their Price wouldn't appreciate to anticipated levels, which means the less net worth of the nation.
The less the money being spent by the government, the lesser resources you have on streets. Money just changes hands. But the major spender is the government. The less they spend, the lesser it flows in the streets. Expenditure is always a rising component in any society. With less money changing hands in the streets, something must take a hit. It's often the quality of the products and services offered. if the problem still continues, wages and employment levels take hit.
If the UK is further downgraded, the pound will depreciate a lot. Which means the cost of products/services will go up, with the wages remaining the same. What would happen to those on the streets? Cost of daily consumables goes up by ~10-15% from the same wage that they had been receiving. Which impacts the consumption of a nation. The UK is a trade deficit nation, so the outflow is always higher than inflow. This difference exacerbates and will continue to rise.
If you see, the rating downgrade is the first step confirming a nation growth is in downward trajectory. Indirectly implying to the companies/rich to start moving out & stop additional investments. If someone brings in 100 pounds and because of the rating downgrade, if the pound crashes by 5%, the investor has only 95 pounds now. Why would he bring in his money? What would he do? He just moves out his money to protect downfall. Corporates borrow additional money and move everything out. Once the currency is devalued, they bring back some of it and pay off their debts. They get to keep the difference.
