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Effect of USA’s Lowered Credit Rating

by Rebecca Black on April 30, 2012

In early August of last year, President Barack Obama raised the debt ceiling to allow Congress more time to collaborate on necessary budgetary cuts and hopefully save the economy from going completely under. The decision had a significant impact on more than just the voter polls — Standard & Poor lowered the United States’ credit rating from AAA to AA-plus over obvious concerns about the government’s spending habits, rapidly rising debt, and budget deficit. Since 1941, the U.S. has held the Triple-A rating and the proposed downgrade raised many an eyebrow over potential impacts this status change would have on the economy. S&P called for $4 trillion in cuts necessary to effectively reduce the national debt but President Obama was unable to even obtain half of that.

Projected Impact

Shortly before and after the credit rating was lowered by S&P, economists and politicians whispered warnings about the economic mayhem that could ensue. The chance that borrowing costs would rise for all parties involved — the government, companies, and American consumers — was at the top of the list of possible outcomes discussed. S&P hinted at, or rather warned, that another downgrade was possible in the next year or so. Furthermore, it was projected that the downgrade in credit rating would gradually increase cost of mortgages, auto loans, and all other types of lending related to the interest rates paid on Treasuries. There was no doubt: the already bleak outlook of America’s economy had just darkened significantly. But speculation seemed to be just that and nothing more. Regardless of whatever fears economists, critics, and consumers may have had, the weeks following the dropped credit rating revealed a relatively stagnant reaction in the economy.

Reality Check

Despite the alleged negative outcomes of the lowered rating, the only significant blow was to the U.S. prestige. The United States now joins the four other countries sporting an AA+ rating: France, Guernsey, Isle of Man, and Austria. Of those five, only Guernsey and Isle of Man have a stable AA+ rating. Setting the pride bubble-burst aside, the impact of the lowered credit rating turned out to be a much less dramatic event than predicted. Perhaps this is due to the fact that many people, economists or not, predicted this outcome well in advance or the event. Thus, the reaction to the reduced credit rating came as no huge surprise to anyone. If any significant impact to borrowing and lending in the market occurred following the rating downgrade, it was not widely publicized and by all accounts, it is hard to tell whether or not the lowered credit rating did much damage at all. In fact, mortgage rates are currently lower than ever. If the rating had lowered earlier on in Obama’s presidential term, it might have garnered more attention and concern, but some critics say there is just too much going on aside from an AA+ rating for Americans and economists to spend much time fretting. It’s not like the economy wasn’t bad enough to start with — a lowered credit rating couldn’t have made things much worse if it had been intended to. Consumers have enough on their plate already and the politicians involved in the upcoming elections are facing a heavy burden.

Looking to the Future

With all the economic problems at hand, presidential candidates are having a tough time wooing voters with their promises of recovery. Barack Obama already took the promise route without offering much bang for his buck and voters are tired of getting their hopes up with no return. Politicians will have to propose some smart changes to the 2012 federal budget in order to prove their economic savvy and earn the vote of the debt-burdened Americans. There are two problems with the budget revision however. For one thing, consumers know we need to make substantial cuts to the budget but nobody wants to give up their Medicare, Medicaid, and Social Security, which accounts for more than half the federal budget.

So far, Mitt Romney is the only candidate with any prior experience with changing S&P’s ratings for the better. During his term as governor of Massachusetts, Romney managed to convince S&P to upgrade the state’s credit rating in favor of the sound fiscal management in place and the strength of the economy. S&P did in fact upgrade the credit rating as a result of the discussion, raising it from an AA to an AA+. Romney advocated shortly after the lowered U.S. credit rating that Obama should have collaborated in person with S&P. Whether or not Romney can work his magic on our economy should he be elected remains to be seen, but at the moment, he certain stands in the best position to do so given his history.

Meanwhile, S&P seems more preoccupied with Spain’s credit rating than it is with the United States’ credit rating. Based on stated concerns over Spain’s government finances deteriorating more than they previously foresaw, S&P downgraded 11 of Spain’s banks’ long-term and short-term credit ratings to a BBB+ and A-2 from A and A-1. They have also placed a CreditWatch on six more banks.

Categories: News

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