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U.S. Credit Rating at Risk

If you’re concerned about the long-term ramifications of the growing federal debt, you’re not alone.   Two major credit ratings agencies, Moody’s Investors Services (Moody’s) and Standard & Poor’s (S&P), issued a warning to investors about the possible future downgrade in the credit rating of the U.S. Government.

 Moody’s report issued this week stated that the U.S. Government “must reverse the expansion if its debt if it hopes to keep its ‘Aaa’ rating.”  Separately, the head of S&P France said that “the firm could not rule out lowering the outlook for the U.S. rating in the future.”

A downgrade in the rating is not imminent, but these statements can be seen as a warning signal to investors. 

Credit rating agencies are supposed to provide an independent and objective opinion of the creditworthiness of publically-traded debts.  The credit rating impacts the interest rate and the value of the bonds when they are traded on the secondary market.

The following are a few of the factors contributing to the forewarnings by Moody’s and S&P.

  • The rapid and continued growth in the federal debt over the past 4 years
  • Rumblings in Congress over the reluctance to increase the debt ceiling
  • Sovereign debt issues roiling Western European countries and the Eurozone
  • The recent backlash to Moody’s and S&P for giving high credit ratings to mortgage-backed securities that turned out to be the equivalent of junk-bonds

Moody’s and S&P may have their own selfish motivations for these advanced warnings, but it’s a message to be heeded.  There were early warning signs that the housing market was in trouble, but most people brushed them aside.  Likewise, there are warning signs that the size and growth of the federal debt poses serious financial threat to us that you should not ignore.  The recent comments by Moody’s and S&P are one of those signs.

So… what does this mean to you? Probably not much at the moment.  However, the long-term consequence may be significant.

A downgrade in the credit rating of U.S. Treasury securities would likely cause an increase in the interest rate on future debt issues. Increasing interest payments will further exacerbate the current budget crisis.  Since more money is required to pay interest on the debt, less money is available for other spending, thereby further increasing the deficit or causing larger spending cuts.

A downgrade in the credit rating would also impact what it costs you to borrow money.  Virtually every loan in the U.S. in directly or indirectly tied to Treasury rates.  Be it credit cards, auto loans, home mortgages or business loans, you can expect the cost of borrowing to increase for any type of credit you obtain.

Moody’s and S&P may have intended their statements to be a “heads-up” to investors, but the audience is much larger.  Hopefully it’s a message our political leaders will heed regarding our current fiscal situation.  It’s also a message to you as an individual.  You may not be able to control what happens in Washington, but beware and be prepared.  A future downgrade in the U.S. credit rating may be coming, and if it happens, it’s going to cost you.

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