Standard & Poor's Downgrade of U.S. Government Long-Term Debt [August 9, 2011]   [open pdf - 216KB]

"On August 5, 2011, Standard & Poor's (S&P) lowered the credit rating of long-term U.S. government debt from AAA (the highest possible rating) to AA+. The downgrade reflects S&P's judgment that (1) the recent Budget Control Act (P.L. 112-25) falls short of what is needed to stabilize the government's fiscal situation and (2) the capacity of Congress and the Administration to deal with the debt has become less stable, effective, and predictable. A ratings downgrade is meant to signal the market that an issuer of bonds or other debt securities is less likely to repay interest or principal. In municipal and corporate bond markets, in which investors may choose among many similar debt issues, a downgrade usually leads to higher borrowing costs, as investors demand higher interest rates to compensate for greater perceived risk. U.S. Treasury securities, however, play a unique role in the global financial system, meaning that past experience with downgrades of private or government debt may not apply. […] Borrowing costs at those institutions are subject to the same uncertainty that applies to the U.S. Treasury. Bank regulators issued a statement on August 5, 2011, that depository institutions will not be required to hold more capital to offset greater perceived riskiness of Treasury securities. The effect on consumer and business interest rates depends on what happens to Treasury interest rates. Many private borrowers pay rates that are implicitly or explicitly linked to Treasury rates; if Treasury securities pay higher interest, mortgage, credit card, automobile, and business loans are likely to become more expensive as well. But the downgrade alone need have no effect on those rates."

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CRS Report for Congress, R41955
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