- (Reuters/Brendan McDermid)
The Standard & Poor’s credit ratings agency changed United States financial history when it announced on Friday that it would be downgrading the U.S. government’s top notch rating from AAA to AA+.
American investors are now sitting in wait for the Asian market to open on Sunday night to see the true impact of the S&P downgrade. One thing is for sure; the downgrade will have an affect on both shareholders and the general American public.
An expected result of the downgrade is an increase in the interest rates on America’s growing debt. Investors believe that this increase could be as high as a 0.5 percentage point above the current rate.
General market talks suggest that interest rates could go up $10 billion annually in the short term and rise $75 billion in additional costs over coming years.
Standard & Poor’s decision may also hit the U.S. economy by increasing the cost of mortgages, auto loans, student loans and other kinds of lending linked to the interest rates paid on Treasuries.
When the costs of borrowed money rises, so does the price for anything you are not paying for with cash. Businesses would have to spend more to expand and according to ABC News, a half percent increase in mortgage rates on a $172k home would mean an increase in total average cost of $19k.
Anthony Valeri, a market strategist at LPL Financial, believes the downgrade is “a reflection of the fact that we haven’t done enough to get our fiscal house in order. Sovereign credit quality is going to remain under pressure for years to come.”
A downgrade such as this is likely to slow financial enterprise, because people will spend less if they have to pay more. Some reports estimate that the GDP, a primary indicator used to read the health of a country’s economy, could drop by one percent.
A slowing of the GDP increases the risk of a second drop into recession. There is also the potential for U.S. debt to go up because there will be less tax dividend.
“The minute you start downgrading away from AAA, you take small steps toward credit risk and that is something any country would like to avoid,” said Mohamed El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co., in a Bloomberg interview.
A slowing economy is bad news for the stock market because it would mean a decrease in profit growth or a drop in revenue numbers. Share values will also slip. Some officials believe that could mean another 1,100 points on the Dow.
The ripples caused from the S&P downgrade would affect America’s employment ratings. Less economic activity would mean less demand for workers. Third Way, the non-partisan group published estimates revealing a 0.5 percent increase in interest rates would eliminate over 640,000 jobs.
Standard & Poor’s said in order to avoid a credit downgrade the United States had to raise the debt ceiling and create a "credible" plan to handle the country’s long-term debt.
Come Monday morning Americans should have a better idea of the direction the U.S. is heading economically and what officials plan to do about it.