Credit rating agency Standard & Poor’s has downgraded the United States’ credit rating to 'AA+' from the highest 'AAA' rating the US has enjoyed since 1941.
S&P Downgrades America's Credit Rating to AA+
S&P now considers the world’s largest economy to be more risky than 19 other markets, including Australia, Canada, France, Germany, Hong Kong, Isle of Man, New Zealand, Singapore, Switzerland and UK, all of which are still rated triple-A.
As an 'AA+' credit issuer, the US is now on a par with Belgium in S&P’s estimation, only one notch higher than economically troubled Spain ('AA') – and just two notches better than China, Japan and Israel (all three are rated 'AA-' by S&P) in terms of ability to repay sovereign debt.
Announced on August 5, S&P’s downgrade diverges from the earlier decision of two other major credit rating agencies, Moody’s Investors Service and Fitch, to retain America’s triple-A rating following a last-minute compromise agreement on August 2 to raise the country’s debt ceiling.
There seems little prospect of S&P upgrading the US back to triple-A anytime soon. Indeed, S&P indicates that the risk is more on the downside. “A higher public debt trajectory than we currently assume could lead us to lower the long-term credit rating again,” it said.
The US credit rating may stabilize at 'AA+', said S&P, “if the recommendations of the Congressional Joint Select Committee on Deficit Reduction – independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners – lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics.”
It remains to be seen what the impact of the downgrade on corporate and household finances will be. Before S&P’s action, US investment bank JPMorgan Chase estimated 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.
The covenants corporates entered into with their banks on their loans, the structure of corporate investment portfolios and corporate capital budgeting based on a risk-free rate may also be affected.
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