Saturday, August 6, 2011

America Loses Its AAA Credit Rating. What Now?

Just last night it was reported that the ratings agency Standard and Poor's (S&P) that the US had lost its AAA credit rating and been downgraded to AA+ and that the outlook on America's future credit rating is negative, "that another downgrade is possible in the next 12 to 18 months." S&P also stated that the downgrade "reflects [their] opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in [their] view, would be necessary to stabilize the government’s medium-term debt dynamics."

While this is bad news for the US, things could soon get worse as credit agency ratings Moody's Investors Service and Fitch Credit Ratings warned "that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens," with Moody's outlook on America's future credit rating being changed to negative.

While the difference between AAA and AA credit ratings aren't much, what will occur with this downgrade is that the interest rates on borrowing, as well as interest payments, for the federal government as well as all US citizens will increase slightly. 
The New York Times states:

For example, Fannie Mae and Freddie Mac, the mortgage companies that are backed by the federal government, would be downgraded, raising rates on home mortgage loans for borrowers. Maryland and Virginia, their economies tied to the government, would also be downgraded. So would New Mexico, because a high proportion of residents depend on federal benefits.

So while it is not the end of the world, as so many were predicting before the debt ceiling deal was reached, there are still serious consequences. It means that interest rates will go up, thus hitting the poor and the middle class the most.

However, this brings up the larger picture of the role of credit rating agencies. Usually, they can be used as an indicator of the creditworthiness of a nation, but now it seems that they have undue influence in the economic and political realms of a nation. In essence, they can hold an entire country hostage by threatening to downgrade the nation’s credit rating if the agency’s demands aren’t fulfilled.

While there is no argument that the US needs to get its fiscal house in order, we do need to start talking about the role credit agencies should play and the influence they have on a nation’s economy.

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