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US Debt Crisis: Consequences of the US downgrade

Discussion in 'Company Articles' started by Forex News Now, Aug 7, 2011.

  1. Forex News Now

    Forex News Now ForexNewsNow Representative

    Jul 27, 2011
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    This Article was published on ForexNewsNow.com

    On Friday, Standard & Poor’s announced it would downgrade the credit rating of the United States from AAA to AA+. Before the announcement it was commonly believed that the recent agreement over US debt ceiling would allow the US to avoid such a downgrade. But according to the rating agency, the agreement reached in Washington is “not enough to stabilize the debt of the United States in the medium term.”

    In its commentary, the credit rating agency denounced “the gap between the political parties” and the “predictability of the decisions of American policy,” yet in doing so Standard & Poor seems to have fallen into the all too common trap of making a political judgment in the place of a purely economic one. No doubt that politics and economy are intrinsically intertwined, yet the fact that the two other credit agencies have not downgraded their US ratings, signals that Standard & Poor’s may be going out on a limb with their decision., in an effort to be “ahead of the curve”.

    The indignation of the White House is therefore quite understandable: the President had just finished mediating an end to the debt crisis and felt confident announcing to his fellow citizens that the U.S. was finally able to confront the country’s debt issues.

    The immediate consequences of S&P’s downgrade:

    • - Interest rates on U.S. debt will increase. Indeed, investors require higher returns in function of the risk, and this rating is an important risk indicator, although not the only one.
    • - The fiscal impact will be major: a 1% increase in interest rates would cost $140 billion dollars.
    • - The confidence of international creditors, and especially central banks, is shaken by an evolution of this type, and will make the financing of the U.S. debt more difficult.
    • - The dollar is expected to be weaker on Forex markets.

    There are also many international implications emanating from this decision. First and foremost the announcement comes at a very bad time for America’s strongest allies, the economies of Western Europe. On Friday, the debt risk premium for Italy and Spain increased to one of the largest gaps since the creation of the euro, due to concerns that the two countries could be dragged down by the Euro Zone debt crisis.

    In addition, the US’s up and coming global rival, China, is using the announcement to call for the replacement of the dollar with a new global currency (presumably China’s own currency, the Yuan). China seems to be taking this opportunity to shake global confidence in the US economy, while also seeking to deflect ongoing US criticism that the Chinese artificially undervalue their currency to cheapen the price of Chinese exports.

    During this climate of significant weakness in both the European and American stock exchanges, we could see a panic reaction this week in the Western markets. After a 10% drop of the Dow Jones in two weeks, the worst might be yet to come. Yet do not mistake current European weakness with the long-term ascendancy of China. In depth economic analyses continue to show that the Chinese economic model is unsustainable and China may be in for some serious crises of its own in the near future.

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  2. lindiA

    lindiA Recruit

    Aug 10, 2011
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    Thanks for the info! I was gathering much resources as i can about this topic and i happen to come across your page.

    I was browsing through some sites and i've read the latest about the debt downgrade. Apparently, the credit rating bureau Standard & Poor's (S&P) made an unparalleled decision on Friday to lower the country's once-impeccable AAA rating down to AA. The industry is being guided by an experiencing of unease and uncertainty, and the American consumer may soon be feeling it as well. Some say the downgrade won't have enduring outcomes, but others disagree.

    Article Source: <a title="Uncertainty about how debt downgrade will affect U.S." href="http://personalmoneynetwork.com/moneyblog/2011/08/08/sp-downgrade-effecs/">Uncertainty about how debt downgrade will affect U.S.</a>

    This is not good. Last week i've read about the credit rebates and now this?! Unbelievable! When is this economic turmoil ever going to cease? Everyday is always a battle in our economy. I think that the government is making matters much worse than it already is.

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