U.S. Credit Rating Downgraded to AA+
Written by Faith Anderson on August 9, 2011
Possible Adverse Effects of Downgrade
In opposition to S&P’s decision, South Dakota Democratic Senator Tim Johnson called the downgrade “irresponsible,” claiming that it could have “spillover effects that tax the American people by increasing interest rates on home loans, credit cards, and car loans, and by increasing the cost of finance for some state and local governments.” Others, including House of Representatives Majority Leading Eric Cantor, oppose the downgrade claiming that it is “overly focused on resolving the debt crisis in a manner that would greatly worsen the jobs crisis.”
S&P Recommendations for U.S. Government
Standard & Poor’s has placed the U.S. on a negative watch for another possible downgrade to AA status in the next two years if spending cuts promised in the debt ceiling deal aren’t met. In order to regain its AAA rating, S&P expects the U.S. government to reduce federal debt to about 60-65% of GDP, which has historically been about 40%. To achieve the debt target, the government requires at least $4-5 trillion in savings over the next ten years. The U.S. debt is currently 74% of its GDP, and even with strong growth, government expenses will keep that number high. The U.S. Congress must pass a plan to generate these additional savings in 2011 in order to prevent further downgrades. S&P made it clear that budget cuts alone are not enough to reduce deficits, taxes must also be increased to add revenue to the Treasury.
The goal of the S&P downgrade is to encourage the U.S. government to generate enough savings from its debt deal to stabilize the national debt so that it will no longer continue to grow faster than the economy. According to S&P, the government must create a framework to address the costs of an aging American population. This may include an increase in the age limit at which Social Security and Medicare benefits could be accessed, possibly excluding people who have jobs or savings from both of these programs. Other strategies to reduce deficits may include the U.S. government compromising on its defense budget, which supports large deployments of armed forces and material overseas, and taking steps to ensure a fair repayment of debt to China.
The Future of the U.S. Credit Rating
In Washington, the S&P downgrade of the U.S. government will likely increase pressure on the new Congressional “supercommittee” to end ideological differences in favor of devising an immediate deficit reduction package that goes beyond the $1.5 trillion called for in the recently-passed U.S. debt deal that raised the nation’s debt ceiling. According to Senator John Kerry, the S&P downgrade of the U.S. credit rating poses a set of choices not just about the recession, but about a financial crisis and the structure of the U.S. economy. In order to restore the U.S. to its AAA credit rating, both Republicans and Democrats must make compromises, even on hot topics like increasing tax revenue and Social Security programs. The U.S. government must take deliberate steps to improve its policies towards certain obligations in order to put the country’s economy back on track.