US Government Credit Outlook Downgraded

S&P, one of the three main ratings agencies has cut is credit outlook for the US government from stable to negative. S&P has cited the fact that all other AAA rated nations either have a manageable debt level or have put in place budgetary measures to stabilise their deficit.

S&P have cited the lack of agreement between the Obama Administration and the Republican controlled House of Representatives as the major concern. It seems very difficult for either side to put in place a comprehensive deficit reduction plan in the way that the UK has.

The reduction in the US credit outlook now means that there is a 1 in 3 chance the US will lose its AAA rating inside of two years. The main concern if the US lost this status is that the cost for the US Government to issue new bonds would rocket hitting the US with a double whammy in the way that Greece and Ireland have been hit. The second main problem would be that the dollar would likely lose its status as the world reserve currency. This would further hamper the USA as China, Japan and Middle Eastern countries would be likely to sell the large number of US treasuries they hold.

It is our opinion that the US is unlikely to actually lose its AAA rating however the response to the S&P move from Washington and the Fed reserve was simply to meet the news with scepticism. US leadership seems to still feel itself immune to the movements of world markets in the way that countries such as Germany, United Kingdom and Canada have long since learnt to respect. US leadership seems to simply be of the opinion that America is too big to fail and that in the end the economy will grow fast enough to reduce the size of the deficit.

Lack of political leadership and the bi-partisan nature of US politics may make any reduction in the deficit impossible. While the US economy is growing it is far below the levels of growth seen in the 1990’s which was able to switch the US from deficit to surplus. The US can no longer regard itself as the un-matched economic super power of the world. In the end the market will win every time and the current administration is flirting with disaster. Both the Democrats and Republicans need to come to their senses and look at increasing taxes and cutting public spending.