It seems as though an agreement has been reached that will, for now at least, prevent the USA defaulting on its debt. It may however be too late to save the USA’s AAA credit rating, and they might not be the only ones.
Many countries, most notably China are now looking at the US political system askance. Even though it seems as if default will be avoided, that politicking allowed it to come so close to the brink is seen as being dangerously irresponsible. This change in attitudes towards America is likely to have several tough consequences for the world economy.
A triple-A credit rating allows a country to borrow money at a cheaper rate than other countries. This obviously provides a lot of advantages. The rating is exclusively for those with “extremely strong capacity to meet financial commitments”. It is a sign for investors that their money is safe.
One of the dangers for America and other countries having the debt rating down graded is that it signals a mismanaged economy. Investors will be reluctant to invest in companies that are operating in this kind of volatile environment. The fear is that this will hamper job creation, and further slow the recovery.
Historically government bonds have been seen as one of the safest asset classes. This looks as though it could be in danger of changing, due to the levels of open default increasing and also by what amounts to ‘default by the back door’ i.e. allowing inflation to run riot reducing the value of debt.
Aside from the USA only 18 other counties have a triple-A rating. Of these countries several others may face a downgrade, the UK being one. Expenditure is exceeding income, in short. For now however the markets and the ratings agencies have seen the governments actions on debt in a positive light, but this could be subject to change. The most likely nation for a downgrade looks like it is France though.
For investors it seems likely that bonds may not perform well. Along with the stock market and other traditional asset classes there seems likely to be choppy waters ahead. Some investment experts are now touting so-called ‘alternative investments‘ as a hedge against the storms of financial uncertainty. Alternative investments are things such as antiques, art and fine wine.