5 Consequences of US credit downgrade

[B. Kidd]

5 consequences of a U.S. credit downgrade - The Week

 

[waltky]

Granny says, "An' ya got dem politicians to thank fer it...

Downgrade turns up heat on Congress
August 5, 2011: The downgrade of the United States' AAA credit rating will apply even greater pressure on Congress to follow through on plans to tame the nation's debt.

Over the next few months, Washington is set to engage in a series of battles over the fiscal course of the federal government. And that debate will largely be carried out through a new bipartisan "super committee." The 12-member panel -- six Democrats and six Republicans -- will have until Nov. 23 to propose how to cut between $1.2 trillion and $1.5 trillion in deficits. Congress will then take an up-or-down vote on the proposals by Dec. 23. In its downgrade announcement on Friday, credit rating agency S&P said it could "stabilize" the country's rating if the committee's work helps lead to debt-reduction measures "beyond the minimum mandated."

The committee was established by the debt ceiling deal signed by President Obama this week. The law put caps in place on domestic and defense spending, resulting in cuts of $917 billion over 10 years. According to the Budget Control Act of 2011, Congress must appoint members to the committee in the next couple weeks. Members will be tasked with finding ways to cut the deficit while navigating tough issues that have festered in Washington for decades: taxes, along with cuts to entitlements, defense and discretionary spending.

The members of the committee will face intense pressure from lobbyists and special interest groups, as well as their fellow lawmakers -- who have to run reelection campaigns and want their views represented. A dispute has, of course, already erupted over whether the committee will tackle taxes, and which baseline should be used to measure cuts. While the committee -- once appointed -- faces a series of tough choices, they also have a powerful incentive to finish their work on time, and on budget. The committee's goal is to cut at least $1.5 trillion in debt. If it fails to do that or deadlocks, the sword of Damocles will fall on most forms of spending in the federal budget. Specifically, as much as $1.2 trillion in across-the-board cuts would kick in -- evenly divided between defense and non-defense spending.

The battle over 2012:

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China demands U.S. 'live within its means'
August 6, 2011, The largest foreign holder of U.S. treasuries responds to the S&P downgrading by calling for decreases in U.S. military outlays and social spending.

China called on the United States to "cure its addiction to debts" and "learn to live within its means" in a searing commentary published Saturday by the official New China News Agency in response to Standard & Poor's historic downgrading of the U.S. government's credit rating a day earlier. China, the largest foreign holder of U.S. federal debt, blamed "short-sighted political wrangling in Washington" for creating the current financial morass that now threatens to undermine the global economy.

"China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets," the commentary said. "If no substantial cuts were made to the U.S. gigantic military expenditure and bloated social welfare costs, the downgrade would prove to be only a prelude to more devastating credit rating cuts, which will further roil the global financial markets all along the way," it continued.

China has regularly voiced concern about its dollar investments, most recently Wednesday when the governor of the country's central bank urged the U.S. to avoid a default and cut its deficit. In addition to holding about $1.2 trillion in treasuries, an estimated two-thirds of China's $3.2 trillion in foreign exchange reserves is estimated to be in dollars.

Standard & Poor's downgrading was the first in U.S. history and echoed downgrades issued by a little-known Chinese credit rating agency that has been dismissed by some China watchers as politically motivated. The Dagong Global Credit Rating Co. twice lowered its rating for the U.S., most recently Wednesday when it said defects in the U.S. political structure stood in the way of solving the country's debt problems.

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