The Global Economy in Turbulent Times

CHAPTER 35 The United States Is No Longer AAA¹

Standard & Poor’s (S&P) had on August 5, 2011, cut the US long-term credit rating by a notch to AA-plus (from AAA). This unprecedented move reflected concerns about the US budget deficits and rising debt burden. It called the outlook negative, indicating that another downgrade is possible in the next 12 to 18 months. According to S&P, the August 2 debt deal approved by US Congress, which raised the debt ceiling beyond US$14.3 trillion and cut spending by US$2.1 trillion, didn’t go far enough: “It’s going to take a deal about twice the size to stabilize the debt-to-GDP ratio.” It also stressed what it saw as the inability of the US political establishment to commit to an adequate and credible debt reduction plan: “The effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.”

Moody’s Investors Service and Fitch Ratings haven’t followed S&P’s move, causing a split rating. They had earlier (August 2) affirmed their AAA credit ratings for the United States while warning that downgrades were possible, grading the outlook as negative. At the same time, China’s only rating agency (Dagong Global Credit Rating) downgraded the United States from A-plus to A, saying the deal won’t solve underlying US debt problems or improve its debt servicing ability over the long run.

US Downgrade

What does a rating downgrade mean? For the United ...