How Will A Debt Downgrade Affect The United States?
S&P downgraded the United States AAA rating after reviewing the government’s debt ceiling debate debacle. The U.S. government lost its top tier rating and dropped to AA+. A lot of people believe that this downgrade will have a substantial impact on the United States and its governmental policy. I do believe that a ratings downgrade should focus the government on increasing GDP growth, reducing unemployment, and increasing fiscal responsibility. But here are a few reasons why the ratings drop does not matter.
The United States still has a top rating with 2 other rating agencies
For those that care about the ratings that the agencies place on the United States, the U.S. still has a top tier rating with the other two agencies. Fitch and Moody’s have not downgraded the nation’s credit rating. This means that 2 of the top 3 ratings agencies still believe that our borrowing costs should be at the lowest rate. One dissenting agency will not have as much effect as long as the other two stay at the top level.
Ratings agencies are as wrong as they are right
Rating agencies are notorious for being wrong with their ratings. These agencies are the same ones that completely missed the dot com bust and the housing crash. They were giving every mortgage backed security (MBS) ad collateralized debt obligation (CDO) a triple A rating. They took a group of junk securities and slapped a great rating on them causing investors to buy them. It is tough to have even faith in the ratings of agencies that were prime culprits in the last financial collapse.
U.S. debt is still the most attractive
The debt of the United States is still the most attractive debt to own. Foreign countries, individual investors, and institutional investors will continue to buy the debt of the world’s best economy. Look at the demand for United States Treasuries and yields are terrible. Two year notes are paying 0.29%. Ten year Treasuries are yielding 2.3% and 30 year Treasuries are yielding 3.5%. Are investors going to suddenly buy the debts of Italy, Spain, and France whose economies are not as stable as the United States and are crumbling under debt problems? China has nowhere else to turn to invest in safe dollar assets.
No change in risk based capital weightings
Fed chairman Ben Bernanke released a statement right after the announcement stating that their would be no change whatsoever in risk based capital ratings. This means that the capital positions for the banks will not have to change. Had Bernanke chosen to adjust the ratings banks would have had to increase their capital ratios which would have reduced the amount of money that is available to lend.
No substantial change in interest rates
Rates at the Federal Reserve’s discount window will remain unchanged and banks will still be able to get access to cheap capital. The Fed is also prepared to start QE3 to help stimulate the economy should the high unemployment rate and low GDP numbers lead to another recession.
Tags: debt downgrade