America's Triple-A Credit Rating Is Affirmed -- For Now

US President Barack Obama signed into law a hard-fought measure that raised the country’s debt ceiling by US$2.4 trillion through 2013, ensuring that the world’s largest economy will be able to borrow money to pay its bills.

 
The move prompted Moody’s Investors Rating and Fitch to affirm America’s triple-A credit rating, which could have been downgraded if Congress had not authorised new borrowings by August 2. The two credit rating agencies warned, however, that the US rating could still be downgraded in the medium term if the nation’s massive US$14 trillion public debt – estimated at around 96% of GDP – is not brought under control.
 
US investment bank JPMorgan Chase estimates that a downgrade will increase US borrowing costs by US$100 billion annually and also raise mortgage rates, car loans and other consumer and business lending linked to the interest rate the government pays on Treasury bills.
 
In turn, the higher cost of doing business and consumer spending could hurt the fragile economy. Second quarter GDP growth has been tracked at just 1.3% on an annualized basis, far slower than forecast, while first quarter growth was revised downwards to 0.4%.
 
The new law requires cuts in government spending of as much as US$2.4 trillion over ten years, which can further slow economic growth and even tip it into a contraction. Some analysts already expect a double-dip recession in the US, which could contaminate Asia and the rest of the global economy.
 
“We’re going into a recession, a really big one, bigger than 2008 – I’ll hang my hat on it,” John Taylor, founder of FX Concepts, the world’s largest currency hedge fund, told Bloomberg on July 20. “It’s descending upon us already. Next year’s going to look worse.”
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