By: Dr. Mike Campbell
The ratings agency Standards and Poor’s has reduced its rating of the credit worthiness of US bonds by one notch from the highest AAA rating to AA+. The move is deeply symbolic meaning that the agency is no longer confident that investors in US government bonds will not get their fingers burnt. The rating indicates the agency’s confidence that the issuer (in this case, Uncle Sam) will not default on its debt obligation. A triple A rating means that the rating agency has full confidence that investors will recoup their investment when a bond falls due.
Even AAA investments can hit the rocks (in the corporate world, at least), so the rating is not an absolute guarantee that an investment is risk free, but Standard and Poor’s is now suggesting that the chances of investors in US government bonds are subjecting themselves to a higher degree of risk of a default. This normally will mean that the issuer has to offer a higher interest rate on their bonds to attract investors. If this happens, America’s cost for servicing its massive national debt is set to rise. If other ratings agencies follow suit, US borrowing costs will certainly rise, but at the moment, only S & P has moved to downgrade the US rating. Should this happen, it is likely that the Dollar will fall on Forex markets in the same way that the Euro has responded to various chapters in the European sovereign debt crisis.
S and P gave the reason for their decision as being their concerns for the US budget deficit; the eleventh hour wrangling about raising the US borrowing ceiling could not have helped either. The agency has offered a negative outlook on the US economy going forward.