The credit rating agency Standard & Poors recently downgraded the U.S. from its pristine AAA credit rating to a still strong AA+ rating. How exactly does this affect your business and the international business landscape as a whole?
This is the first time that the U.S. economy has been downgraded since it first received a credit rating in 1917. Only 15 other countries still hold the perfect triple-A rating. They are Australia, Austria, Canada, Denmark, Finland, France, Germany, Luxembourg, Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland and the United Kingdom. The AAA rating allows nations to borrow capital at lower rates, because their governments are viewed as safe and their bonds are considered secure. You can view a list of country's credit ratings here.
S&P gave two reasons for downgrading the U.S. debt. The nation’s financial health leading into the future and its inability to create a plan to undertake the nation’s long-term debt. Research has estimated that government debt will increase to 79% of GDP by 2015 and 85% by 2021. These levels are consistent with AA+ rated countries. On the other hand, Greece, the lowest rated country in the world, is forecast to see its debt well exceed the size of its economy, at nearly 150% the size of its GDP by 2015.
A debt reduction deal that would have cut deficits by $4 trillion or more over 10 years would have likely avoided a AA+ rating in the near term. Instead, the debt deal set into place will only cut $2.5 trillion in the next decade. Conversely, the International Monetary Fund estimates that debt levels at AAA rated countries such as Canada and Germany will only rise to 34% and 52%, respectively. These levels are consistent with countries that have very sustainable economies leading into the future.
The United States still has a very high rating; it has not been downgraded to “junk” status. This is not going to help matters, especially in the soft post-recession economy that we are faced with. The U.S. can return to its flawless triple-A rating, but it is going to take some time. To read up on the S&P downgrade of U.S. debt, I recommend this article.