According to Standard & Poor, the U.S Government is facing a 50% risk of losing its AAA credit rating as the current indicators are suggesting that government deficit targets may not be achieved. The U.S Government is approaching its $14.3 trillion borrowing capacity limit in August. This will directly affect the Treasury debt payments and failures on federal and military employees’ paychecks. The American government is looking at their credit rating downgraded to the AA rating if there is no demonstrated meaningful activity towards reduction in their deficit.
The deficit reduction debate is scheduled for August 2nd, and the U.S Government needs to focus of implementing policies and programs to repay their debt.
Standard and Poor said that Freddie Mac and Fannie Mae debt will be downgraded; also, Federal Home Loans Banks and Federal Farm Credit System Banks AAA credit ratings will be downgraded to match the U.S Government’s sovereign credit rating. They did indicate that in general banks and brokerages would probably not suffer downgrades immediately. S&P also explained that there is a correlation between insurance groups’ rating and sovereigns’ rating; therefore, these will also be downgraded.
They also said that if an agreement is not reached for deficit reduction and increasing debt ceiling would throw the country back into recession, and it is a highly unlikely scenario, as this will actually adversely affect the global financial markets.
In such an imaginary situation, S&P is predicting sharp reduction in Treasury spending and the Federal Reserve injecting another economic aid cycle. There would be a rise in interest rates up to 50 bps on short term and 100 bps on the long terms. Standard & Poor did emphasize that this would only be possible if the Treasuries did not lose their safe-haven-for-investors status that they have held for ages, or would investors turn to Gold for benefits. S&P also warned that it sees a weakening U.S Dollar and equity markets, and widening yield spreads that the corporate borrowers will have to deal with.
The U.S Treasury market has become sensitive to the news of the U.S defaulting, even with the hope of avoiding default through a downgrade based long-term fiscal conditions.
It is critical for the U.S economy to look at improving their economic position, as it will not only spell disaster to the country, but also because of the international economic relations, the global economy may be at risk.
