On December 8th, 2009, the Credit Rating Agency Moody’s stated that, “The United States, along with 16 other countries, could lose their Triple-A credit rating if fiscal deficits and heavy debts are not effectively managed.” While the group stressed that the threat is not immediate, it did point out that a downgrade could come as early as 2013 if the nation’s fiscal position does not improve.
The report added, “The currently abnormally low interest rates are unlikely to last, and will be replaced by higher interest rates that will affect the affordability of the much larger debt burdens that some AAA governments now carry.” Should the United States lose its AAA rating, it could have numerous negative consequences. Interest rates could increase, which will increase the cost of borrowing, there might be a large outflow of investment, as some global funds are only allowed to invest in AAA rated countries, and it could threaten the dollar as the main global reserve currency.
It is important to note that while Moody’s sees the current situation as testing the AAA credit rating, they also point out that in their estimation the United States has an “adequate reaction capacity” to overcome and reverse the problem.
Moody’s said the pace and sustainability of the economic growth and the path of interest rates will be key if countries can manage their significant debt burdens that have built up as they increased spending in the recession and bailed out banks, while the slow economy dried up tax revenues. Let us hope that the government heeds the warning signs and works to get America’s financial situation back on track.