What Really Happens if US Loses Triple A Rating?
The impact of a debt downgrade is somewhere between the extreme positions that have been stated in the course of the debate. It is not automatically the end of the world but it isnt without consequences. The loss of the rating would mean that bond yields for the securities would go up by perhaps half a percent. That means $435 billion would be added to the deficit over the next ten years and that translates into perhaps an additional $65 a year on a $200,000 mortgage. The problem with predicting impact is that a downgrade may not even change the yield. It has been pointed out that Australia has a solid AAA rating and one of the lowest deficits among industrial nations their debt as percentage of GDP is less than 20%. They pay 4.9% on a ten year government note. The Japanese have a debt to GDP number of 220% and they have a rating of AA. They are paying 1.1% on their ten year note.
Analysis: There are a few institutions that will be required to dump US securities if they fall below AAA but the majority of holders will not be forced to react. They will sell if they can figure out what to invest in as an alternative but there just arent that many options these days. The real fear is that these are untested waters and nobody really knows what this all means. In some respects the debt downgrade is nothing more than an acknowledgement that Congress is dysfunctional and cant figure out how to address the core issue. There are some who assert that the ratings agencies are running a risk of becoming irrelevant by taking this position. If downgrading the US debt really doesnt change anything there will be more nations and businesses that will assert that their own downgrades are just as meaningless. The power of the rating is its ability to change the action of the investor and there is a significant risk to the raters in making a statement about the US that investors then simply choose to ignore. The reality is that the debacle in the US is artificial and likely temporary and the raters might be wise to leave well enough alone.
