A grim outlook befalls the U.S. government as S&P drops the country’s credit rating by one notch, with the possibility of adverse effects to interest rates at banks and financial institutions.
During the late hours of Friday, Standard & Poor’s (S&P) announced a downgrade, from AAA to AA+, of the long-term credit rating of the United States – creating the possibility that consumer interest rates will rise.
Having held the top AAA credit rating, U.S. Treasury securities were considered the safest investments worldwide until now. It represents the first time in modern national history that the country’s “credit score” has ever fallen.
“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” said S&P in a statement.
Hours before the August 2 deadline, U.S. lawmakers were able to get a budget deal signed to avert the possibility that the U.S. would default on its debt obligations. Even though an agreement was ultimately finalized between political parties, S&P expressed concern over the manner in which it was handled.
“More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges,” S&P added.
The entire ordeal resembled a troubling financial situation between a married couple, where either spouse was unwilling to cut their spending portions as they came dangerously close to their credit card limits.
Along with Moody’s Investor Service and Fitch Ratings, S&P is a credit rating agency much like credit bureaus Experian, Equifax, and Transunion. The drop in the U.S. credit rating is equivalent to decreasing the couple’s credit scores simply for having a drawn-out argument of how to control their spending, despite never defaulting on their loans.
Similar to how the couple faces higher loan interest rates for having a lower credit score, the U.S. government may end up handing out higher interest yields on Treasury debt to attract money. Unfortunately, interest rates on mortgage loans tend to move proportionally with Treasury yields. Although credit card interest rates are tied to the prime rate, which varies on the Fed funds rate, issuers may hike card rates as well.
So, it’s possible that Americans may begin seeing higher interest rates when applying for a new loan or line of credit. But, the S&P downgrade is more likely to strike a blow to confidence in the U.S. economy.
Moody’s and Fitch have maintained a AAA rating for the U.S. but downgrades could ensue if the American economy continues to weaken.