Effects of credit rating downgrade of America to AA+

It finally happened.  After ratings agencies Moody’s and Fitch affirmed America’s triple A ratings but with negative outlook, China’s Dagong Agency and S&P Drops US Credit Rating to AA+ shortly thereafter.  S&P said that in addition to the downgrade, it is issuing a negative outlook, and there is a chance it will lower the rating further within the next two years. It said such a downgrade, to AA, would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.

We research on some effects of this first time ever lowering of their credit rating:

1. Higher borrowing cost –

A) Government – The interest rates the government pays to finance their 14 trillion dollar debt will rise. America will have to pay more just to service their debt.  It is speculated that an increase in rates that would up the annual tally by about $10 in the short-term and go up to $75 billion in additional costs in the coming years.

B) Joe Public – mortgages, student loans and credit cards are all tied to the rates the government pays. A half a percent increase in mortgage rates could increase the total cost of the average traditional mortgage by $19K (on a $172K home). Businesses would have to spend more money to finance expansions. Costs for borrowed money goes up, effectively raising the price of anything you’re not paying for with cash.

2. GDP also affected? – increasing borrowing costs siphons of liquidity from the market and hence reduces economic activity somewhat.  Estimates put a downgrade like this as likely to shave 1 percent off GDP. This increases the risks that the U.S. will have a second dip into recession. It also means less tax revenue, so the potential for additional debt increases.

3. Stock market effect? – initial selloff.  Investors buy shares to get a piece of growing profits. A slowing economy means profits grow less rapidly or go down. The relative value of a share of anything will go down. Some experts predict a downgrade could force stocks to sell-off by 6 percent to 10 percent in short order. That’s another 1,100 points on the Dow.

4. Will not help jobs numbers – finally, abcnews writes that any slowdown in economic activity also means less demand for workers. The non-partisan group Third Way has published estimates that a simple 0.5 percent increase in interest rates could erase more than 640,000 jobs.

Not to worry though, chances are, the stock market won’t simply go to hell just from this downgrade.  A study by JPMorgan Chase found that there has been a slight rise in rates when countries lost an AAA rating. In 1998, S&P lowered ratings for Belgium, Italy and Spain. A week later, their 10-year rates had barely moved.  According to Fitch, there is some precedent. In 1998 Japan’s credit rating was cut from AAA, and while it temporarily drove up interest rates, in the long run it had little effect on the nation’s economy or its currency.  The downgrade may have made things a little worse, but the American government better get their act together to reduce spending.  I believe the focus on the economy would be more important.

sources:
http://abcnews.go.com/Business/sp-drops-us-credit-rating-aa-easy-understand/story?id=14244259
http://finance.yahoo.com/news/SampP-downgrades-US-credit-apf-2107320979.html

Comments

  1. PANSALT, the low-sodium salt from Finland, is now available in the Philippines. PANSALT is the tastier & healthier way to salt. With PANSALT, you can avoid and better manage hypertension and its unwanted side-effects such as heart attack, stroke and kidney disease, among others. PANSALT has also been approved as an organic food ingredient by the European Commission. Make that switch to PANSALT NOW!!! For more information, visit http://www.pansalt.ph or contact (02) 531-4881/ 0917-811-SALT (7258).

Content Protected Using Blog Protector By: PcDrome.

Please don't print this Website

Unnecessary printing not only means unnecessary cost of paper and inks, but also avoidable environmental impact on producing and shipping these supplies. Reducing printing can make a small but a significant impact.

Instead use the PDF download option, provided on the page you tried to print.

Powered by "Unprintable Blog" for Wordpress - www.greencp.de