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Issue of the week: Does a U.S. downgrade matter?

The debt deal has prevented an immediate downgrade in the country's credit rating, but the U.S. could very well lose its AAA rating in the future.

We may have dodged the default bullet, but “it’s only a matter of time before the U.S. loses its stellar AAA rating,” said Nin-Hai Tseng in Fortune.com. Several rating agencies signaled this week that they wouldn’t downgrade U.S. credit immediately, but that doesn’t mean they were impressed with the debt deal. If a downgrade does come, it “will underscore just how deep the nation’s debt problems have become.”

The prospect of the U.S. being slapped with AA status is “not good, full stop,” said David Wessel in The Wall Street Journal. The sky probably won’t fall, though. Because of the sheer amount of government debt issued, even a minor hike in interest rates would be very expensive for the government. But “there’s no way to know for sure” whether a lower rating will trigger such an increase. A major sell-off of U.S. Treasury bonds is unlikely because big holders of government debt, such as mutual funds, insurance companies, and foreign investors, have nowhere else to go. Even AA-rated bonds will still be considered one of the world’s safest places to park your money. In fact, in “an ironic twist,” a downgrade could actually cause Treasurys to rally, said the Financial Times. Investors might flock to them because the bonds would surely be the safest AA-rated product on the market. After all, “a bet against the richest and most powerful country on the planet is never a safe one.”

An even safer bet would be to ignore the rating agencies in the first place, said Thomas Beck in Politico​.com. Didn’t they give their seal of approval to toxic financial instruments and help create the housing bubble? What’s more, they’ve proved their ratings are “farcical” by giving an AAA rating to the U.S. for decades despite knowing “that Washington was engaged in a colossal Ponzi-type cycle” of debt. Forgive me if I no longer consider their judgments useful.

Let’s not kid ourselves, said Felix Salmon in Reuters.com. Perception matters. In a world where the U.S. is rated AA, “when things go wrong, they will go wrong more dramatically and more drastically” than if the U.S. held on to its gold-star rating. If markets fail to react much in the event of a downgrade, it just means we aren’t feeling the effects yet. The worst news? “The first downgrade is always the hardest.” The rating agencies will find future ones much easier to dish out.

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