From AAA to AA-plus Credit Rating - Another Crisis?

According to BBC News report, late on Friday, Standard & Poor (S&P) has dowgraded the United States' credit rating from AAA to AA-plus for the first time in history.  According to S&P, "the downgrade reflects their view of the effectiveness, stability, and predictability of American policy making and political institutions have weakened at a time of ongoing fiscal and economic challenges.”

The downgrade happened just few days after President Obama signed into law a last minute compromise plan to raise nation's $14.3 trillion debt ceiling, narrowly averting what could have been an unprecedented default with calamitous economic consequences.

Last Monday, August 1, the U.S. House passed the compromise measure by a 269-161 vote, overcoming opposition from unhappy liberal Democrats and tea party Republicans.  Then the Senate passed the plan, which imposes sweeping new spending cuts over the next decade, on a 74-26 vote on Tuesday afternoon. (Source: CNN, August 2, 2011)

What is S & P?

S & P or Standard & Poor’s provides investors who want to make better informed investment decisions with market intelligence in the form of credit ratings, indices, investment research and risk evaluations and solutions.

Reasons for the downgrade?

Critics of the new Budget Control Act note that $2.1 trillion in cuts won't significantly slow the growth in U.S. debt.  And it doesn't explicitly tackle the drivers of the country's long-term solvency problem -- the ultimately unaffordable entitlement programs and a tax code that doesn't generate enough revenue to match the country's appetite for spending.  Those are the reasons why S&P chose to downgrade the United States.

The Effects of the downgrade?

CNN Money says that Wall Street had experienced its worst day today since the 2008 financial crisis, as fearful investors reacted to the United States losing its most precious AAA credit rating.

Wall Street Journal reported that Gold, which is seen as a safe investment in times of economic uncertainty, jumped to a new record high of $1,713.20 an ounce.  Meanwhile, the price of oil slipped further, reflecting concerns that weak global growth could lead to a fall in demand.  US light crude ended down $5.57 to $81.31 a barrel - its lowest closing position since November of last year.

The Treasury claims that S&P’s conclusion, will likely cause the dollar to sink and push up domestic interest rates.  Days after S&P announced the clipping of US' credit rating, there is a growing concern that the interest rates will rise for anyone borrowing money - from credit cards to mortgages to auto loans.  Today,  mortgage rates are breathtakingly low - just over 4% on a 30-year fixed.  According to an interview conducted by CNN on a home buyer, "Now is the time to invest in properties before the interest rates change". 

President Obama said: "Markets will rise and fall.  But this is the United States of America, no matter what some agency may say, we've always been and always will be a triple-A country."

President Obama said he would now be putting forward a new plan, including higher taxes for the biggest earners, and reduced spending on Medicare.(Source: Bloomberg, August 8, 2011)