S&P downgrades US credit outlook – 21 April

The US national debt is only one of the key factors that Standard & Poor’s looked on when it has decided to revise the credit outlook of the United States to negative.

The second reason probably lies in the US budget deficit that the rating companies are looking over. S&P along with other rating companies feel that if the US government won’t find a way to slash the US budget in the next couple of years this might cause the United States to loose its triple A rating.

The debt rating of AAA that the US has been holding since this rating has commenced.

The current US external debt is over 14.45 trillion US dollars, which is nearly 97% of the U.S. GDP.

As of January 2011, China holds over 1.1 trillion US dollar of US public debt and Japan holds over 885 billion US dollar. For these two economies alone it is imperative that the U.S. won’t reach default because they might not be able to sustain such an impact.

E.g. Japan’s current external debt is 2.2 trillion US dollars which is 51% of its GDP and its public debt is 225% of its GDP, which was estimated at 5.4 trillion US dollar in 2010. If the US will be default this will mean that Japan will lose, in its GDP terms, nearly 15% of its assets. Since it already has a high debt to GDP ratio, this will have a very adverse effect on Japan’s economy and might cause it to default and so will begin a domino effect.

This harsh scenario however is far from coming true any time soon.

The most apparent effect this announcement of the US future credit rating is the rising commodities prices, mainly gold which is near 1,500$ and energy commodities such as crude oil. I think that most of the traders and investors don’t look at this negative rating as the near demise of the US, but as a warning that the US dollar will continue to drop in value. Adding to the equation the quantitative easing plan of the Federal Reserve, in which over 600 billion US dollars are printed to finance part of the US public debt, and you will have a scenario in which commodities will continue to rise.



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2 comments for “S&P downgrades US credit outlook – 21 April

  1. Pingback: The US Debt Ceiling: The How, Why and What Could Happen? « The Investment Insight
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