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S&P dropped the U.S. credit rating to AA+, one level down from the top credit ranking of AAA since 1941, on concern that agreement on spending cuts and the raised borrowing limit wouldn’t be enough to reduce deficits. The downgrade was estimated to raise the national’s borrowing cost by $100 billion a year, as Treasuries are still strong in demand and other lending costs such as mortgages, auto loans and the like are also expected to increase.
Moody’s and Fitch Ratings affirmed the AAA credit ratings, but kept the reservation to downgrade the rank on condition that the debt reduction measures fail and the economy deteriorates.
The rating cut may hurt the economy. It is estimated that a 50 basis point increase in Treasury yields would bring about a decrease of 0.4 percent points in economic growth. Treasuries’ risk is hoped to be kept at a purely interest risk, but the downgraded rating increases its credit risk.
No matter what the credit rating is, the slowing down of global economic growth and the spreading of Europe’s sovereign debt crisis get investors fewer alternatives outside the U.S., keeping Treasury yields at quite a low level. But the dollar’s status appears to be slipping as its portion of global currency reserves dropped from 72.7% in 2001 to 60.7% ended March 31 this year. Strength of the currency is considered in priority rather than best among choices when building reserve currencies.
The credit-rating cut was out of some authorities’ expectation and it was likely to increase Treasury yields by 60 basis points to 70 basis points over the medium term, causing a rise in interest expense, a larger percent of GDP. The impact is significant, because $100 billion a year outlay will be moved from economic stimulus area to interest spending.
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