We know that in some cases we know that the impact of going down in the ratings is minimal - as it has been in the case of Japan where the government keeps funding very large deficits at low interest rates.
But what is more interesting, given current circumstances, is whether the rating can be seen as an absolute measure of the probability of default or a relative one. If you check what agencies say, they will not give you a definite answer to this question.
To the question "Are Credit Ratings absolute measures of default probability?", Standard and Poor's answers:
"Since there are future events and developments that cannot be foreseen, the assignment of credit ratings is not an exact science. For this reason, Standard & Poor’s ratings opinions are not intended as guarantees of credit quality or as exact measures of the probability that a particular issuer or particular debt issue will default."Which is not too informative. And then they add:
"For example, a corporate bond that is rated ‘AA’ is viewed by Standard & Poor’s as having a higher credit quality than a corporate bond with a ‘BBB’ rating. But the ‘AA’ rating isn’t a guarantee that it will not default, only that, in our opinion, it is less likely to default than the ‘BBB’ bond."This is more informative but not much of a surprise: One would hope that at least the relative ranking of ratings says something about the relative default risk.
So if ratings are relative and they are all going down (deflation has also reached rating agencies), it might not matter much for investors. This might be a signal that the world is more volatile than what we thought, and this is not good news, but as long as nothing else look safer than these bonds, it might not change much the portfolio strategy of investors.
There is however a risk: that investors seek safe returns somewhere else. This happened to some extent in the period 2003-2007 where investors looked for returns in assets other than government bonds because of their low yields. And financial markets were very good at creating assets that offered higher returns and that apparently where as safe as government bonds. But we know that this story did not end very well.
We can imagine going forward a world where investors move away from government bonds not so much because of low yields but because of the perception of risk, and theysearch for yield in assets that appear less volatile or where the expected return more than compensates for the potential risk. We have seen this behavior in the gold market, the exchange rate market (with the Swiss Franc until the central bank said enough). But if deflation in ratings continues it is very likely that we will see similar phenomena in many other markets.