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Released: August 06, 2011

The U.S. is downgraded. Now what?

Source: Dylan Matthews, The Washington Post

Standard and Poor’s announced tonight that it downgraded the U.S. debt from AAA to AA+. Commentators are split as to whether this would have major negative consequences for both the U.S. and world economy, or whether it would be basically meaningless. Here’s the case for each position. Why It Might Matter: If the U.S. debt gets downgraded, many other debt instruments will likely get downgraded as well. When Moody’s put U.S. debt on review for downgrade during the debt ceiling standoff, if also put on notice 7,000 other bonds, worth a total of $130 billion, that rely directly on revenue from federal government payments, such as certain kinds of municipal bonds. Bonds that are indirectly dependent on the federal government, such as those issued by hospitals that receive Medicare payments, or defense firms reliant on Pentagon contracts, could get downgraded as well. In addition, many everyday interest rates - such as those for mortgages, car loans, and credit cards - are pegged to US Treasuries, meaning that if a downgrade forces up interest rates on US debt (which is likely, but will depend on how the markets react) interest rates for those will shoot up as well. This would raise the cost of borrowing across the system, depressing the economy.

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