Fallout from the S&P US National Debt Downgrade

Kudos the S&P for being the first major debt rating firm to downgrade US debt to AA+.  Essentially they warned Congress that $4 trillions in cuts was required in a debt ceiling deal, Congress only ponied up about $2 trillion.  Bill Gross of PIMCO saw this coming as did many, many others including this finance blog.

The importance of the credit downgrade is the message it sends to voters and to Washington:  The US Treasury  is not immune the market realities of global economics.  The giant US credit card has terms and conditions ultimately dictated by global bond markets.  As debt-to-GDP ratios increase so will borrowing costs.  The long-term trajectory of US debt growth, under current law, is staggering.  Further the cocktail of massive debt, out-of-control debt growth, and a weak US economy do not bode well for future US debt ratings.

Unfortunately I don’t think this message is being heard or understood by a sufficient number of Americans.  Gross and El-Erian get it.  The US House of Representatives is starting to understand. The Senate and the White House do not.  Neithe does the US Treasury saying “There is no justifiable rationale for the downgrade?”  Seriously, what meds do they have to be on to say that with a straight face?  The American public has a degree of understanding, but not sufficient concern or attention.

The fallout of the downgrade will be modest but wide-ranging.  It will be good news for AAA rated companies and countries like Exxon Mobile, Britain and German.  The debt rating will be bad news for adjustable-rate mortgage holders, US bond holders, and entities that are required to hold US Treasuries.

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