Moral Outrage
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Downgrade of the US AAA credit rating

A downgrade of the United States’ stellar AAA credit rating seems likely.

The White House had been alerted repeatedly over the past month by rating agencies that without a strong, long-term plan to restructure the country’s debt, they would lower America’s credit rating as soon as today, according to two officials familiar with the process.

Earlier this month, Moody’s and Standard & Poor’s, the nation’s top two rating agencies, placed the U.S. government on notice of a downgrade of at least one notch, if not more, to a AA rating. In a written statement, S&P analysts said they believed “there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.”

Taking his message to the country last Monday night, Obama stressed how unprecedented it would be to see a credit downgrade. If the debate heads much further, he said, “For the first time in history, our country’s AAA credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet.”

With so many moving parts in the global economy, it’s difficult to measure the precise impact of a U.S. credit downgrade on the global economy.

One specific effect would be a mass sell-back of U.S. bonds. Billions of dollars in outstanding bonds are held by people, countries, and agencies that only hold bonds guaranteed by AAA sellers. All of those would likely move immediately to sell in the wake of a credit downgrade, or change internal policies to retain the bonds. The ratings of all viable U.S. institutions, including Fannie Mae and Freddie Mac, would fall as well, potentially increasing mortgage-interest rates and borrowing costs on other loans.

More difficult to measure would be the loss of American financial prestige. Reduced confidence in the dollar, say some analysts, could result in reduced borrowing for U.S. economic growth. Difficulty getting credit could retard the economic recovery and send long-term waves through the financial system.

[Yahoo News]


3 Responses to “Downgrade of the US AAA credit rating”

  1. On the day of the signing of the debt ceiling bill, credit rating agency Moody’s said the United States will keep its sterling AAA credit rating “for the time being”, but lowered its outlook on U.S. debt to “negative.”

    A “negative outlook” indicates the possibility that Moody’s would downgrade the country’s sovereign credit rating within a year or two.

    Standard & Poor’s has yet to weigh in on the debt ceiling deal.

  2. Aug 5th update: Well, it happened:
    Standard & Poor’s downgraded US debt today.

  3. Aug 7 – S&P’s downgrade was as much a political critique as a financial conclusion. It is based on a view that American political leaders would be unable to come up with at least $4 trillion in savings, which is needed to bring the nation’s debt to a manageable level over the next decade.

    The two other major credit rating companies, Moody’s Investors Service and Fitch Ratings, have said they would preserve the nation’s AAA rating for now.

    But keep an eye on China. Back in July, China’s Dagong rating agency reduced the US rating to A+. By August 2, it went down to A with a negative outlook.

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