Standard and Poor's credit rating for US has been downgraded from AAA to AA+ on Friday. This is a big blow to the US economy. There was a rumor for the past few days that the US rating will be downgraded if US not increasing the debt limit. After a big discussion between the White house officials and the republicans, the debt limit is increased and the default is avoided.
In spite of the increase in the debt limit, S&P downgraded the credit rating of US. This is a historical change for US. Their rating was at AAA from 1917 onwards and for the first time it has been downgraded.
The strongest US economy is downgraded means how is it going to be for the other European countries like Spain, Italy rating. After the World war the global economy is rely on the US economy and due to this downgrade the world economy is going to suffer greatly. The main debtor of US is China which has the maximum investment on US Treasuries nearly 1.15trillion.
What is the impact of this downgrade to US?
Due to this downgrade the credibility on US investments is gone. The investors will start demanding for higher interest rates as the US securities are not reliable. This will have pressure on the interest rates of home loans, educational loans and credit card loans in US. Already US people are facing problem due to inflation and un-employment, this increase in interest rates will make them to reduce their spending. Already Government started reducing their spending. This will cause reduction in money flow that will result in the collapse of US economy.
How this is going to affect the world economy?
Global economy is completely on US economy as the trading currency is USD. All the countries are keeping a lot of USD and US Treasuries. If US economy collapses, the currency value will go down, the countries invested on USD (complete world has invested on US) will lose their investments value. This in-turn will affect their economy. The intensity of impact is based on the amount of USD/equivalent (Treasuries) investments by the countries. The major investors are China and Japan. China is already started giving pressure on US government. Japan has not yet recovered completely from their economic burst they faced in early 1990's and are facing tough time this year (Tsunami and Earth Quake impact).
Already European market is having great impact due to economic burst in Ireland and Greece. Now Spain and Italy is facing financial crisis. The US rating downgrade will add more pressure for them. European Central Bank is trying to support Italy bonds and Spain bonds that are losing its value.
In such a critical economic conditions, countries like Indonesia are improving. US and Europe are getting into the recession, now investors are identifying which risky and non-risky investments. China and Russia are shouting for the new trading currency other than USD for quite some time but there is no big alternate for USD for investments.
There are many other questions that will be raised due to this downgrade and there will not be an immediate solution for most of the questions.
How are they going to face the issues that are going the raise due to this?
What is the impact on the Global economy?
What is going to be Gold price?
Will there any change in the trading currency?
What is going to be the next step for China as they are the major debtor?
Will there be a great recession happen in US?
And so on.....
One thing is very clear that US must reduce their spending and start working on increasing their revenue. Even if they do so, it will take time to recover as this economic situation is reached over a period of time.
Saravanan
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