Saturday, August 6, 2011

After 70 Years, the US Loses AAA Credit Rating

IN THE NEWS from Reuters

Ratings agency Standard & Poors has just downgraded the credit rating of the United States from AAA to AA+ amid concerns about the country's debt problems and shaky economic outlook. The move comes a few days after US lawmakers reached an agreement to address the government's worsening budget troubles and a day after the worst US stock market decline since the 2008 financial crisis.

Implications for the US

The credit rating downgrade signifies an increase in the perceived riskiness of the financial securities issued by the US and reflects concerns that the recent debt deal might not be able to resolve the country's medium-term fiscal woes. There has been widespread clamor from various sectors to include provisions that will increase taxes for the wealthiest Americans, a detail that US lawmakers have agreed not to include in the deal. The downgrade effectively increases the cost of borrowing of the US (remember, higher risk, higher return), devaluing its outstanding bond issues and increasing the interest rate on all future debt issues.

Implications for everyone else

Apart from an initial negative reaction by international markets on Monday, the move is expected not to have much of a global impact. Then again, the way these things go, no one can ever really say for certain. We all just have to wait for how things will unfold in a couple of days and be ready to pounce on any opportunity that may arise.

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