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by Don Azarias
October 16, 2011
Though it had enjoyed a triple-A credit rating since 1917, the recent downgrade by Standard & Poor’s credit rating agency on the United States debt rating wasn’t entirely unexpected. But before we go any further, it would be worthwhile for us to know that there are three main credit rating agencies in this country, they are: Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.
While all three credit rating agencies had warned during the contemptuous battle in Washington, D.C. over debt ceiling that the nation faced a downgrade if Congress did not cut spending far enough, only Standard & Poor’s made good on its threat to downgrade while Moody’s and Fitch are holding off, for now.
The lower credit score now implies that the United States, as a borrower, is a less reliable debtor in the eyes of creditors. As a result, bonds and other certificates of indebtedness issued by the U.S. government in the open market are deemed to carry more risk to the investors and buyers.
To have a clear picture, just compare the situation to each one of us whose credit rating is being monitored by Trans Union, Equifax and Experian. Your credit rating could be stellar or poor. But don’t get upset if you have a bad credit. Even Uncle Sam is not immune to it.
In the case of the United States, as a debtor, the interest rate on U.S. Treasury bonds could go up, if investors and buyers of U.S. debts get nervous and stop buying them. In order to remedy the situation, the U.S. will raise those bonds’ rates or yields to make them more attractive to investors. That could lead to higher borrowing rates for consumers, because the rates on mortgages and other loans are often pegged to the yield on Treasury bonds.
Increasing costs for consumers and businesses tend to slow their economic activity and would, most likely, cut into the gross domestic product (GDP). It also means less tax revenue, so the potential for additional U.S. debt increases. And, as the economy slows, the stock market tends to react with global stock sell off. Consequently, slowdown in economic activity would result in lesser demand for workers. Not really welcome news for the already depressed U.S. job market.
Standard & Poor’s also downgraded the credit ratings of mortgage giants Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), which are both backed by the U.S. government. That could mean higher mortgage rates for new borrowers. Freddie and Fannie together own or guarantee about half of all mortgages in the U.S. And let me remind the readers that, like all federal government agencies, they have been hurt to the core from years of mismanagement by those politically-appointed managers.
Variable rate mortgages and home equity loans could become more expensive as well. The high failure rate for adjustable rate mortgages during the housing meltdown means that, today, the number of new home loans with adjustable rates is minimal——less than 5 percent of the market.
Meanwhile, home equity loans (HELOCs), are almost always variable rate loans and typically adjust more frequently than first mortgages. Homeowners with such loans could see shifts in their rates and payments in an upward trend.
According to Trans Union, consumers across the country, who carry an average $4,950 on their credit cards, will be relieved to know that any changes as a result of the downgrade won’t be dramatic. Most accounts with fixed rates were converted to variable rates in 2009 in response to the economic downturn and new regulations. Banks don’t publicize the rates they’re charging current customers, but nearly 96 percent of the offers sent out for new cards in the first six months of this year carried variable rates. Right now, banks are offering an average annual interest rate of 14.4 percent, according to Bankrate.com
However, like HELOCs, most card rates rise and fall with the prime rate, which is pegged to the rate set by the Fed. That will help protect credit card users from the market’s fluctuations in the short term. The good news is that even if market forces start sending card rates higher, current account balances will be protected from rate hikes under the credit card reforms passed in 2009. That means only new charges would be subject to higher rates. If rates rise several times over a period of months, card users could end up with multiple rates on various balances. The law now requires banks to apply any payments above the minimum required to the highest rate balance. In that way, those new balances may get paid off faster.
It’s true that investors lost a trillion dollars in the in the stock market as the debt crisis in Europe, lackluster economic news and a downgrade to the U.S. credit rating spark fears of a double-dip recession. But I think the United States was able to stand up and surmount the adversities. It can still show the world that it’s an economic powerhouse like no other.
I find it really disappointing for a country like China to display such a childish attitude for criticizing and taking cheap shots at the United States during this economic debacle. Those Chinese don’t seem to realize that their trade relationship with the Americans is a two-way street. While it’s true that they buy our bonds, we, in turn, use the money to buy their goods and services.
I also find Russia’s Prime Minister Vladimir Putin’s unkind words undiplomatic and uncalled for. How dare him call the United States “parasite” on the world economy. This coming from a bully who had to jail a Russian billionaire on trumped-up charges for perceiving the man as a rival and, therefore, a potential threat to his leadership. Maybe we should remind Putin that the United States is the only country on earth that provides help to other countries all over the world, friends or foes alike.
As I try to put this U.S. credit rating downgrade into perspective, I think the United States will always be a strong and resilient nation for generations to come. We will always prevail as long as we have the right leaders in the White House and on Capitol Hill. And as voters, we have the responsibility to see to it that it stays that way come 2012.