"Now that Standard & Poor's sparkling, perfect triple-A rating of U.S. Treasury securities has dropped to AA-plus, what does this mean for you and me? It's like our collective 850 credit score has been downgraded below 720 -- from beyond excellent to good but not spectacular.
A downgrade is uncharted territory for the U.S., but one outcome seems likely: Americans could face higher interest rates on mortgages, car loans, credit cards and other consumer loans. Business probably will also have to pay more to borrow money, which isn't helpful to the economy. Post continues after video.
"If there's a downgrade, and it looks likely, it's quite easy to say that interest rates will go up," Chris Christopher Jr., a senior principal economist at IHS Global Insight, said in a Bankrate.com article several days ago. "And in the end there will be a lower demand for loans, so short-term funding costs will go up for banks."
But remember, this has never happened before. The Hill's On the Money blog said earlier today: "A downgrade would deliver a psychological blow, as the nation would lose its top rating for the first time in its history, but it is unclear what the financial fallout might be."
Here are some possibilities:
Higher taxes. The interest on Treasurys will go up to reflect their higher risk, which means the cost of the nation's debt will increase accordingly. And the U.S. can't continue to maintain this course of no tax hikes indefinitely. The resistance to higher taxes by some politicians in the debt ceiling deal suggests the country isn't serious about paying its bills and is considered one of the reasons for the lower rating.
Stephen Gandel wrote at Time:
Not all of the country's debt will have to be refinanced, but if it did a 1.15% higher interest rate would cost the country roughly $170 billion more a year in borrowing costs. The cost to the average American household, if it were passed along in higher taxes, would be about $1,550 a year.
Higher homebuying costs. Interest rates on mortgages track Treasury yields. "A 1.15% higher rate on a $200,000 loan would raise your interest payments by $36,573 over the course of the mortgage," Gandel said.
Guy Cecala, the publisher of trade magazine Inside Mortgage Finance, told Bankrate that homebuyers could face higher fees as Fannie Mae, Freddie Mac, the Federal Housing Administration and the Department of Veterans Affairs absorbed higher borrowing costs.
Higher inflation. If that's a result, you'll need to stash away even more money for retirement. (Are you saving enough for retirement now? Try MSN Money's calculator.)
The lower rating is no surprise. CNBC said, "On July 14, S&P put the government on a credit watch with negative implications, meaning there was at least a one in two chance the U.S.'s long-term debt would be downgraded within 90 days."
Special coverage of the debt deal
The other two rating services, Fitch and Moody's, left their triple-A rating for U.S. debt unchanged earlier this week but with the prospect that they'd reconsider at a later date.
Rejoining the small group of nations with the top rating -- 15 now that the U.S. has dropped out -- normally takes at least 10 years, Felix Salmon wrote at Reuters.
Australia, for instance, was downgraded in 1986, and only got back into the club in 2003. The record from downgrade to reinstatement is held by Canada, which was downgraded in October 1992, and got its triple-A back 9 years and 9 months later in July 2002.
Losing membership in such an exclusive club has got to hurt, at least a bit.
USA Today wrote:
The real hit could be to business and consumer confidence, already fragile in a weak economy. A downgrade "would be a real shock to the American psychology," says (Howard) Simons (a strategist at Bianco Research).
Eric Dash at The New York Times added:
For most Americans, the prospect that the government could lose its vaunted AAA credit rating is almost unthinkable -- a blow to national pride and consumer confidence that could turn out to be more damaging than any increase in borrowing costs."
-MSN Money
