U.S. Credit Downgrade is A Global Blow, But With Some Positives
Standard & Poor’s downgrade of the U.S. credit rating did more to the global economy than America’s own. Having the world’s leading economy downgraded will rattle economies around the world, as it has never happened before. But some countries with higher credit ratings than the U.S. and businesses that are able to increase their exports could still end up as big winners.
Lowering the nation’s rating below AAA to AA+ represents a major blow to the country’s political leaders and could possibly scare foreign investors. To downgrade the world’s economic superpower could result in a worldwide tumble of stock markets and put us back in a recession.
For more than 70 years the U.S. had a AAA rating, which made the U.S. Treasury bond one of the safest investments in the world. It also made it possible that the U.S. was able to borrow money for incredibly cheap interest rates. This borrowed money was used to keep the government running.
In the long run, S&P’s downgrading could increase the borrowing costs for the U.S. government. These higher costs could also affect consumers and companies, who will have to pay higher interest rates for mortgages, credit cards, and business loans. The once prestigious dollar will become even weaker, which means an increase in the prices of imports such as gasoline.
Similarly, the consequences of the downgrade could become an epidemic that will spread around the globe. Economies around the world continue to struggle, the fight between Democrats and Republicans to agree on a raise of the debt ceiling has increased the people’s distrust in the government, and Europe is in the midst of a worsening debt crisis. S&P’s timing of this downgrading could not have been any worse.
The whole situation also has a few upsides, if you will call them so. Countries with AAA ratings like Germany, Great Britain, Canada, France, and a few more will be able to sell more of their government issued bonds as investors, who are willing to invest, will look to those instead of U.S. Treasury bonds for a secure investment. A weak dollar also enables companies to be more competitive in the world market.
Exports will become a bigger factor for many U.S. companies because their goods will become increasingly cheaper in countries with a stronger currency than the U.S. dollar. Among those countries are Germany and the UK, both are in the top ten of U.S. trading partners. Cheaper goods means higher demands, and higher demands means an increase in profit.
These are a couple exceptions; overall the downgrading will worsen the worldwide situation. How big the impact on other economies around the world will be is hard to tell, but one thing is certain, it will keep the world in its current recession and some experts even compare it with the Great Depression in the 1930s.
Investors will hold back new investments due to economic uncertainty, the same counts for consumers who won’t spend money on non-essential goods. We have seen global stock markets on a roller-coaster ride over the past week, and because a U.S. downgrading never happened before, nobody knows when and where this ride will end.
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