(July 15, 2011) – United States government bonds may lose their AAA credit rating as the Treasury wrestles with the current US debt ceiling, credit rating agency Standard & Poor’s (S&P) announced yesterday in a press release.
Since the US reached its debt ceiling of $14.3 trillion on May 16, the Treasury has taken drastic measures to remain below the ceiling. Still, the ceiling is closing in: according to the S&P release, the measures that have been taken thus far to remain below the debt ceiling will expire on or around August 2 of this year.
While some remain confident that Congress will strike a deal to raise the debt ceiling, S&P has expressed doubts about the deal’s completion. “The positions of the administration and the Republican leadership are still very far apart…the tone of the debate has made us wonder whether a compromise can be achieved,” S&P managing director John Chambers said in a Washington Post article.
Currently, US Treasury bonds hold a AAA long-term rating and a A-1+ short-term rating. According to the S&P report, the long-term rating may fall into the AA range, “If we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.” However, if the US defaults on any of its debt obligations, it will be downgraded to selective default, or SD.
If US bonds are downgraded, the US will lose investments from institutional investors because investment guidelines at most pension funds and other institutions prohibit investment in junk-rated (sub-AAA) bonds. Such repercussions have already been felt in Greece, Ireland, and Portugal – all of which have been downgraded in the past year.
The move by S&P has attracted negative attention from many US politicians. “Moody’s is representing people who stand to gain from the US being able to issue more financing. This is an unwarranted interference in the political process and continues to raise questions about conflicts of interest among the rating agencies,” said Ohio Congressman Dennis Kucinich in a CNN report.
This criticism continues a run of questioning and controversy surrounding one of the world’s best-known credit rating agencies. In June, aiCIO wrote about the Securities and Exchange Commission’s investigation into credit rating agencies’ role in the financial crisis.
By Justin Mundt
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