Downgrading South Africa: What would junk status mean for South Africa? In your discussion, please touch on the following issues: -What does junk...

"Junk bond" is an informal term for a high-risk, high-yield bond. Generally if you get downgraded to "junk status" this means that your credit rating has been lowered so low that you are now only able to borrow in the very highest-risk bonds.

Countries have credit ratings just as companies and individuals do, and these credit ratings are used to decide the interest rates at which they can borrow their sovereign debt in global markets.

The really terrifying thing about these credit ratings is that they are made by private companies---mainly three companies Standard & Poor's, Moody's, and Fitch. Most people seem to think that international credit ratings are issued by the World Bank or by the US government or something; no, these are private for-profit financial corporations, and they've been implicated a number of times in fraudulently distorting credit ratings for their own gain, yet their punishment is usually minimal if anything (linked US Department of Justice filing against Standard & Poor's).

South Africa's credit rating was downgraded at the end of 2015, and may be downgraded again (Barron's article linked). This is because international investors are increasingly concerned about South Africa's inability to reduce its budget deficits, and thus think that maybe they won't be able to repay the bonds on time. This higher risk is reflected in the lower credit rating, and the investors demand higher yields on the bonds before they'll be willing to buy them.

If this happens, there's a chance that South Africa will have to pay higher interest rates, in which case it will be even harder for them to repay their debts, which can create a feedback loop into a full-scale economic crisis. This is another problem with credit ratings; they can be self-fulfilling, as perceived higher risk can create higher risk. The good news is that South Africa has their own currency and their inflation rate is still manageable (about 6%), and so they have room for monetary policy to raise the money supply and bring down those interest rates. South Africa has a relatively high tax burden, however, so they may not be able to raise taxes much---which means they'll need to cut some of their government spending to bring the budget back to balance and ease fears of repaying their debt.