Monday, December 13, 2010 0 comments ++[ CLICK TO COMMENT ]++

US credit rating may downgraded in as little as two years

From The Globe & Mail:

The deal reached by U.S. lawmakers to extend tax cuts and unemployment benefits will spur economic growth, but brings the country’s vaunted triple-A credit rating one step closer to the chopping block.

Moody’s Investors Service Inc. on Monday warned the proposed package will worsen the country’s already stretched finances. That deterioration increases the likelihood that the rating agency will change its outlook on the U.S. rating to “negative” over the next two years, it said. Such a shift would signal that a downgrade lies ahead.

The U.S. rating isn’t in imminent danger, but the caution from Moody’s is a sign that the country’s triple-A status is far from guaranteed and will face pressure sooner than expected.
Not imminent and doesn't mean it will happen but this is the first time I have heard any of the rating agencies seriously suggest that USA may be placed on credit watch negative within 2 years.

The article also provides a handy list of countries presently rated AAA:
Australia
Austria
Canada
Denmark
Finland
France
Germany
Luxembourg
Netherlands
New Zealand
Norway
Singapore
Sweden
Switzerland
United Kingdom
United States
A credit downgrade won't impact USA that much. It will just raise the cost of financing but even that won't increase that much since it will still be rated better than the vast majority of credit instruments. Recall that Japan got downgraded and nothing much happened.

However, since the bond market prices assets off US government bonds—the "risk-free" rate—any downgrade will have a greater impact than Japan or some other country being downgraded.

I personally think USA is one of the strongest credits out there—stronger than most on that list above—and don't think it will get downgraded unless economic growth comes in at less than 2% per year for the next decade and/or USA undertakes additional large spending, like starting a war with Iran or something (depending on how you count, USA spent around $1 trillion on the Iraq and Afghanistan wars and an Iranian war will probably cost upwards of $5 trillion).

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