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Could the United States lose its status as the world's premier safe harbor for global investors?
Credit-rating heavyweight Standard & Poor's last week threatened to cut the United States' top-tier credit rating, saying the country's political infighting and burgeoning debt may warrant a downgrade.
In short: This country's days as a AAA-rated investment may be numbered.
"Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years," said S&P's credit analyst Nikola G. Swann.
S&P said that without an agreement in the next couple years on how to fix its trillion-dollar debt debacle, the United States will be weaker than other AAA-rated countries and will see a credit rating downgrade. U.S. lawmakers still haven't agreed on a way to fix finances since the U.S. budget deficit ballooned to 11% of gross domestic product (GDP) in 2009, from a range of 2% to 5% from 2003 to 2008.
Even if a deficit reduction deal is reached, S&P fears the divide between Washington's political parties is so wide that it threatens the U.S. government's ability to maintain a successful budget policy for years to come.
"We're not saying that no agreement is possible," David Beers, S&P's global head of sovereign and international public finance ratings, told Bloomberg News. "We're just unsure as to the time frame and whether it's going to be seen as credible not just by us but by the broader marketplace."
The statement was a stark warning to politicians that a lack of U.S. fiscal discipline – and lack of compromise in Congress – could strike a painful blow to the country's economic future. Some hope the S&P news is the "wake-up call" Washington has needed, and that it will make officials see how important it is for U.S. leaders to work harder at resolving budget differences.
"It's truly a shot across the bow and a message to Washington, which has been clowning around on this and playing politics when they should toss ideology aside and focus on achievement," David Ader, head of government bond strategy at CRT Capital Group LLC, told Bloomberg.
This prompted last week's Money Morning "Question of the Week": Do you think the United States still deserves its AAA credit rating? Can U.S. lawmakers create and implement a budget that stabilizes the U.S. economic outlook and warrants a top-tier rating? Will this "negative" outlook downgrade be a kick-in-the-pants to get Washington to work harder at reducing U.S. debt?
The collection of responses below shows readers' concerns that the United States is in worse financial shape than originally thought, and the repercussions of a credit rating downgrade could trigger another economic collapse.
Consider it a Warning…
It has been years since the United States deserved a AAA credit rating. But given that the ratings agencies, including S&P, hold a government-mandated monopoly, I am amazed that they did, even at this level of national insolvency, actually publish this statement. Since they always appear late to the crime scene, it makes me wonder if we are even closer to a financial collapse than I had supposed.
Reading between the lines, it would not surprise me if the real meaning of putting the United States on a credit watch is that S&P has decided that we are now on the verge of a financial catastrophe, and the folks there want to have some fig leaf to cover themselves with when it comes. You know, "We warned you that something bad might be about to happen. Of course, no one could have predicted how quickly this all fell apart."
The fact that they issued the statement, weasel-worded as it is, indicates to me that they consider the downgrade inevitable, and probably close, in much less than two years.
— Gordon F.
Deserves It – For Now
Yes, it still does deserve it. There is no chance at this time that the U.S. government will default on its debt. But a few years from now that may not be the case. Standard & Poor's revising the U.S. rating outlook to "negative" from "stable" while affirming its AAA rating was correct.
Out With the Old
The only way to get Washington the kick in its pants is to fire almost everyone, and hire individuals who know what it is like to work for a living. Unfortunately, that will never happen as a lot of the U.S. population bases their vote on a person's name or how many ads they run on television.
— Mat D.
Sure to Be Lowered
Unless there is an almost miraculous agreement on the part of Democrats to take this warning seriously, and Republicans recognize the need to make some compromises prior to next November, our credit rating will almost certainly be lowered.
— Frank T.
Change or Downgrade
If the United States doesn't have major policy changes this year, they need to be bumped down a rating.
— Shaun C.
Don't Deserve AAA
No, I don't think the United States deserves it. The bank would have cut me off and my credit cards would have been cancelled. Not to mention, I would most likely have been turned into credit collections and would be dealing with painfully rude, hateful phone calls from collectors.
Although, I'm afraid of what it will do to our economy and country overall.
Perhaps the government could lower its own personal expenditures and pay all back taxes. (By the way, how is it a Congressman or Senator can avoid listing property or fail to file and the IRS doesn't come after them?)
And the big business owners could decrease automation and return jobs to the American people. First place to start, begin to hire those who are currently unemployed. Then, they could decrease overhead and increase tax revenue.
— Stacey T.
If I had my own printing press for money, I would have a AAA rating, too.
— Robert H.
It's All Politics
It all sounds political to me. S&P did not have America's interests in mind when rating mortgage-backed securities. I find both their timing and motivation questionable.
— Ed T.
Keep U.S. Money at Home
We can spend trillions of dollars helping other countries, but not ours – that's why we are in this mess.
America is going downhill. We spend so much money a year to China just in interest alone! Pathetic. All the people that have died in all wars is just not making sense anymore. It's like they lost their lives for no reason. We are losing our freedom here
Legalize marijuana in all states and the deficit will be gone in less than 10 years.
— Hoch C.
Be sure to answer next week's question: What do you think about the result of the first-ever Fed press conference? Did the press ask the questions you wanted them to? What do you think about Bernanke's answers and the actions the Fed is taking? Do you like the new press conference idea and see any value from it?
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Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]
News and Related Story Links:
- Money Morning:
S&P Downgrade Shows U.S. Debt Crisis Could Have Dire Consequences
- Money Morning:
S&P Debt Downgrade Ramps Up Pressure to Resolve Budget Crisis
- The Wall Street Journal:
S&P Cuts U.S. Ratings Outlook to Negative
- The Wall Street Journal:
Release: S&P Cuts U.S. Ratings Outlook to Negative
- Bloomberg News:
Standard & Poor's Puts ‘Negative' Outlook on U.S. AAA
- Money Morning News Archive:
Question of the Week Feature