Credit Rating of US downgrades – Complete Analysis

Credit Rating of US downgrades – Complete Analysis.

In the recent grading given by the ‘Standards and Poors’, United States of America has been reported to be downgraded by the S & P panel. After being downgraded from AAA to AA+ ratings for long term credit rating, US has lost its premium position of AAA for the first time in the last 95 years. By this credit rating, many countries have started analyzing the reasons and are trying overcome any consequences that may result on them. Even India with credit rating BBB- has also started planning so as to reduce any kind of economic impact upon it due to global market conditions.

Taking a look at some well known countries of the world, AAA rating has been awarded to 3 countries that is Australia, Germany and United Kingdom. The new AA+ ratings are under US, Belgium and New Zealand and AA- rating is under the cap of China and Japan. While the rest countries like Italy have A+ rating, and Brazil is having AA- rating.

The effects that could create havoc in the US economy are many but still they are not needed to worry since they are having a strong withhold in their internal economy. Well some of the probable effects that can trigger include

  1. After the downgrading, analysts consider that US treasury bonds are not 100% risk free now. So people may face problems in their bond investments.
  2. Government’s borrowing cost is expecting increase since the investors will now demand higher interest rates.
  3. The debt bill of US government will definitely increase due to increased cost of credit
  4. Due to increment in balance debt bills of government, chances are there that government may make cuts in their own spendings
  5. This increased debts and bills and the downgraded rating may prove a hurdle for the recovery of US economy because the government expenses will have to be reduced.
  6. The outflow of foreign funds as global funds that were earlier mandated to be invested in AAA bonds will be pulled out

The core reason behind the downgrading of credit scores of US economy lies in the huge debts that US have acquired overtime. As per the estimates US debts amount to $14.3 trillion which includes 36% of publicly owned debts, 17% of Social security trust fund, 8% funds debted from China, 6% debted from Japan , 2.5 % from UK. Rest 30.5% accounts to 15% debts from other countries and rest 15.5% from all other sources.

Though US seems to have faced this downgrade in credit score for the first time in 95 years but this is not new for other countries. In the history of downgrades from AAA rating to lower ratings, over 6 nations have been downgraded by S & P rating panel which include Ireland in 1998 which downgraded to BBB+ rating, while Belgium downgraded to AA+ rating in 1998, Portugal went off to BBB- rating in 1998. Even Spain, Italy and Japan had also downgraded in the past to AA, A+ and AA- ratings respectively. 

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