CRFB Explains the S&P Downgrade
With the S&P downgrade of U.S. debt from AAA to AA+ on the books, CRFB has released a paper that goes into the credit rating system, the possible effects of the downgrade, and how other countries have fared in a similar situation.
We explain the reasons that S&P gave for the downgrade:
The downgrade was issued in part because of the country’s high level of debt and the failure of recent legislation to control it. More significantly, though, the downgrade resulted from increasing questions over the nation’s political capacity to enact further deficit reduction in light of the recent debate.
In addition, the paper goes into the possible effects of the downgrade, while comparing how other countries have fared after being downgraded by S&P.
As S&P and Moody’s have both warned, failure to put our fiscal house in order could result in further downgrades in the next couple of years. In fact, of the 10 other countries that have lost their AAA rating, 8 have seen an additional rating downgrade, including 5 which never recovered their AAA rating. Among those who have recovered their rating, it took an average of about 13 years – the shortest being for Canada, which recovered the rating in just under 10 years.
Also, in order to analyze the data necessary for making the country comparisons, we have made a database that includes other countries' credit ratings (with S&P) and their debt statistics. You can view the Excel sheet here.
To read the full paper, click here.