The downgrading of America’s credit rating

Financial profligacy can’t go on forever. Even in the world’s largest economy. That’s essentially the message that Standard & Poor’s has delivered to the world by downgrading US credit rating from AAA to AA+. It’s not the end of the world. But this action will mean that the US will have to pay higher interest rates on its borrowing. In turn, this means costlier funds for individual American borrowers- whether credit cards or home loans and so on. And because we live in an increasingly inter-dependent global society, this re-rating will adversely impact the cost of borrowing of countries that already are seen to be more risky than the US. And that very much includes India. On the flip side, though, it might make Indian instruments more attractive (or less unattractive) to foreign investors. And that might herald an inflow of foreign capital into Indian stock markets.

But S&P’s analysis may have been impacted by the $2 trillion “error” that the US government quickly pointed out. Therefore, how serious the impact of S&P’s action will be is also a function of whether Moody’s and Fitch (the other two major rating agencies) will also downgrade America’s credit rating.

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