Thursday, September 18, 2008

U.S. Credit Rating Could Be In Jeopardy

The U.S. enjoys the highest credit rating possible, AAA, but that could be in jeopardy and the ramifications of that would be disastrous. The U.S. depends on its ability to borrow money and borrow it cheaply. If our credit rating were downgraded, the cost of borrowing money would go up and it would likely become more difficult to find people to by U.S. debt. The U.S. already has to borrow enormous sums of money just to make the payments on its current debt; an inability to borrow more could lead to default or severe inflation, as the Treasury might be forced to print money.

“By keeping its stake in AIG below 80 per cent, as it did when it nationalized mortgage giants Fannie Mae and Freddie Mac 10 days earlier, the US government will be able to keep the company's finances off its accounts. But pressure is building on the pristine triple-A credit rating of the US government, the chairman of Standard & Poor's sovereign ratings committee said. The bail-out ‘has weakened the fiscal profile of the United States’, John Chambers said. ‘There's no God-given gift of a triple-A rating, and the US has to earn it like everyone else,’” according to The Independent.

This news should be concerning for not only Americans but for the entire world. The U.S. is still by far the biggest player in the global economy, and every country would be impacted if the U.S. credit rating were to drop. Now, what are the chances of this actually happening?

Personally, I think there is a pretty slim chance of the U.S. credit rating getting cut. I'm not saying that we deserve the AAA rating, just that I don’t see them actually cutting it. I don’t think we should have a AAA rating right now, to be honest, but because they haven’t cut it by now, it is going to take an incredible event for them actually to do it.

We have to understand that, for the most part, no one in the world wants to see the U.S. credit rating cut; you can bet that the rating agencies know this and are taking it into consideration. Sure, they can say that the U.S. has to earn it, but we really know that they just don’t want to be the ones responsible for what would happen if the rating was cut. These ratings agencies are the same ones responsible for assigning the high rating to subprime mortgage securities, and we all know how that turned out. Only when defaults started happening en masse did they figure out that maybe they were rating this debt a little too high. We shouldn’t expect anything less when it comes to the U.S. rating, and you have to expect that they are going to be even more careful about messing with this one.

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