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Saturday, August 6, 2011

The US Credit Rating Downgrade- What Lies Ahead?

On the Friday night, Standard & Poor’s, one of the top global credit rating companies, issued a press release stating the downgrade of  long term US credit rating to AA+ from most coveted ‘AAA’ rating.
The bickering between Democrats and Republicans over raising the debt limit in the past few days was one of the prime reasons behind it. If political and economic condition does not improve in USA, further downgrades are not ruled out.
It is interesting to know that other rating agencies like Fitch and Moody’s shall continue with their old credit rating of ‘AAA’.
USA had been enjoying this lucrative credit rating since the year 1941. ‘AAA’ rating had given US treasury products a status of ‘world’s safest instrument’ and helped the nation to borrow at cheapest possible rate to finance social security, war expenses and other government expenditures.
Impacts of US Credit Rating Downgrade
·         Downgrade shall result in waning interest of global investors in US treasury products due to this Borrowing cost of US govt. shall raise.Investment in gold shall be boosted.
·         Consumer interest rates on loans like mortgage loans and business loans too shall hike, as these are loosely interlinked with the govt.’s borrowing rates.
·         Businesses in USA shall require more money for the expansion
·         Downgrading shall worsen the already perturbed European debt crisis.
·         It is estimated that this downgrade could result in the erosion of US GDP by 1%.
Interest rate hike by 50 basis points could cause .6 million people to lose their jobs.
Slowdown in economy could result in higher unemployment


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