S&P's Downgrade

A few weeks ago the rating agency, Standard & Poors downgraded the United States' credit rating from perfect triple-A to AA+. The effects of this downgrade were very serious as the markets reacted negatively towards the news and interest rates in the US are expected to go higher in the near future. Fitch rating agency reaffirmed on Tuesday that in their mind the United States has no possibility of a default in the near future and is still AAA rated. Both these rating agencies are well respected and make valid arguments but who is right?

It depends how you look at it. America is the standard reserve currency for most countries. Other countries hold United States Dollars (USD) in order to back up their currencies and keep inflation low. Those countries and all countries as of now will take $1 USD as face value, no country would refuse USD's. This is why Fitch is right to say the United States can't default because we can always print more USD's. As bad as that sounds and I don't believe it is a permanent solution, the US can print more money today and their lenders will take it. The United States' debt-to-GDP ration is around 80% which isn't good but in perspective, Japan's was well above 100% when it entered its lost decade. The United States is not Japan for many reasons and Fitch was correct to keep its rating AAA and declare it stable.

Standard & Poors downgraded the United States' credit rating and caused a mass panic throughout the financial markets. American politicians from the President to members of Congress publicly criticized S&P for their decision calling it a mistake. S&P said their reasons for the downgrade to AA+ was because of a $2 trillion short fall in budget cuts projections and wanted to see more. This was a concrete statistic S&P could point to but I believe the debate in the American government is what made up their mind. What we saw up to the debt ceiling deadline was a refusal by some members to raise the limit no matter what. We had politicians saying we didn't need to raise the limit, we could default, it wasn't that big of a deal. S&P realized that whether America defaults or not was because of its ability to pay its debts, but because its debts were controlled by humans who may not be the best to lend to. Just like we all have a credit score based on not only our income and expenses but on our responsibility to make payments on time and in full. S&P identified that America's debt could go in default because of the government's decision and not its ability to pay