Markets around the world are set to react Monday to the downgrade of the U.S. credit rating Friday. A look at the downgrade, why it happened and what it means:
Credit rating agency Standard & Poor’s lowered the U.S. government’s credit rating for the first time Friday, from the top AAA rating to AA+. That affects long-term debt, which means government securities that have terms of more than one year.
WHY THE DEBT WAS DOWNGRADED:
S&P blamed political deadlock in Washington that threatens to keep the country from dealing effectively with its debt.
WHAT IT MEANS FOR THE GOVERNMENT:
In theory, a lower credit rating should lead to higher interest rates for U.S. debt. Buyers of government securities can demand higher rates because the lower rating means they are taking on more risk. In reality, Treasury bonds will still be considered among the safest and most liquid investments in the world, and any rise in rates is likely to be muted.
The downgrade could lead to some immediate selling of bonds. That would also drive rates higher. But in a time of economic uncertainty, the relative safety of Treasury bonds compared with, say, stocks, is likely to make investors buyers again.
In addition, the other two major credit rating agencies, Moody’s Investors Service and Fitch Ratings, both still hold AAA ratings on U.S. debt, though both have voiced concerns about those ratings’ future.
WHAT IT MEANS FOR MARKETS AND THE ECONOMY:
The real fear is that the downgrade will add to building uncertainty in the stock market over Europe’s debt crisis and evidence the U.S. economy is weakening. That would compound the worries that sent the Dow Jones industrial average down 5.8 percent last week — 513 points on Thursday alone.
Rates on Treasury bonds also influence rates consumers pay on everything from mortgages to auto loans. A rise in Treasury rates would send those rates higher and hurt Americans’ ability to spend.
HOW CAN THE U.S. REGAIN ITS TOP RATING?
It could be tough for the U.S. to regain the AAA rating soon, especially given its current economic challenges. S&P officials implied that it will take years to see a meaningful change in the U.S. fiscal situation and in the government’s decisiveness.