Is a country's sovereign credit rating important? What is the impact of being lowered? A short answer.

On August 5th, 211, Standard & Poor's (hereinafter referred to as "Standard & Poor's"), one of the three largest rating companies in the world, released a report saying that due to the rising political risk and debt burden of the United States, the outlook of the sovereign credit rating of the United States was lowered from AAA to AA+, which subsequently triggered great turmoil in the global financial market. This is the first time in the history of the United States that the sovereign credit rating has been downgraded, and it is intertwined with the continuous spread of the European sovereign debt crisis, and its impact has not yet been fully revealed and recognized. This paper looks forward to the dynamic development prospect of American sovereign credit rating and debt, analyzes its main influence and puts forward corresponding countermeasures and suggestions.

downgrading and future development trend

Multiple factors lead to downgrading

In the report issued by Standard & Poor's, two reasons for downgrading the US sovereign credit rating were listed:

First, although the US Congress and the government have recently reached a fiscal consolidation plan, the bill lacks the necessary factors to stabilize the medium-term debt dynamics. The bill does not involve the details of the final agreement reached at the end of 211, and Congress and regulators may revise the agreement in the future. Even if the fiscal expenditure of at least $2.1 trillion can be reduced, the debt of the US government will continue to grow, which meets the long-term rating of AA+ and negative prospects. Standard & Poor's believes that the ratio of US government debt to GDP will increase from 74% at the end of 211 to 79% in 215 and 85% in 221. While the government debt ratio remains high, the legal ceiling will be revised continuously.

Second, the effectiveness, stability and predictability of the US government's decision-making and political system have been weakened to some extent, and the financial and economic challenges encountered are more serious than expected when the rating outlook was negative. The U.S. government raises the financial ceiling of the public and the great uncertainty of policy making, and also supports S&P to downgrade the debt rating of the United States. In particular, the Federal Reserve's monetary policy, as one of the bases of national sovereign rating, is increasingly lacking in stability, effectiveness and foresight in the formulation and implementation in recent months. The legal debt ceiling and the possibility of default have become chips in political negotiations in the process of policy formulation. All these factors make S&P pessimistic about the ability of Congress and the government to enter a broader fiscal consolidation plan through agreement to quickly stabilize government debt.

S&P's long-term rating outlook for the United States is negative, indicating that the long-term credit rating of the United States may be downgraded to AA in the next two years. The condition is that the new financial pressure caused by less deficit reduction, higher interest rate or higher general government debt than currently promised exceeds the current basic assumption-this includes two aspects. The first assumption is that the second round of fiscal reduction plan did not happen. This scenario assumes that the nominal interest rate of US Treasury bonds will rise, the US dollar as the main international reserve currency will not change significantly, and the government will still maintain a loose monetary policy and a tight fiscal policy. Under this circumstance, the upper limit of American net public debt will rise from 74% in 211 to 9% in 215 and 11% in 221. The second assumption is that GDP growth is below 2.5% and the annual inflation rate is around 1.5%. In addition, Standard & Poor's is concerned that the historical GDP of the United States has been significantly revised downward, which has had two negative effects on evaluating the US government debt problem: First, the economic recession in 29 was more serious than expected, which led to the increase of nominal interest rate and real interest rate, the GDP growth will be lower than expected, and the debt ceiling will be forced to increase. Second, compared with the recovery after the last recession, this economic recovery is lower than expected. The slow deleveraging process of private sector debt leads to the continuous increase of demand, the financial crisis still exists and the road to recovery is still long.

The effect of stabilizing market confidence in various countries is not obvious

The scale of US sovereign debt accumulation is too large, which has both the inertia of "too big to fail" and the risk of "too big to save". After the United States' sovereign rating was downgraded, the G7 countries quickly responded, saying that they would work together to maintain market stability; The G2 meeting of finance ministers and central bank governors also quickly indicated that they would provide liquidity and policy support to promote the sustained, balanced and stable development of global economy and finance. On August 9, the Federal Reserve made a commitment to maintain the zero interest rate policy until mid-213, and said that it would maintain the policy of reinvesting the national debt when it expires, and may provide support for economic growth through innovative tools. G2 member countries have responded by saying that their economies will not be greatly affected and will adopt policies to promote economic development.

Nevertheless, while the US sovereign debt risk broke out, the European sovereign debt crisis continued to spread and worsen, and Europe's big banks may even be involved in two kinds of "crises" at the same time, triggering new systemic turmoil. These factors are intertwined, which makes investors doubt the ability of countries around the world to deal with the debt crisis in the United States and Europe. On August 1th, after the news came out that France might lose its AAA rating, the global capital market continued to decline sharply, which greatly reduced the stabilizing effect of the Fed's policy the day before. The global stock market plunged for several days in a row (among them, the Dow Jones index ranked fifth in history), the international crude oil price fell sharply, the gold price soared, and the financial market volatility index rose sharply. At the same time, the US Treasury bond market has become a "safe haven", and the yield of 1-year Treasury bonds has fallen sharply and hit a new low since the 28 financial crisis.

In the future, the rating may continue to be downgraded and spread to Europe. The European debt crisis is out of control, and the capital markets around the world are in a panic. The stock market has plummeted and investors have suffered heavy losses! Prices around the world are rising rapidly, and inflation in developing countries is getting worse. The plaintive voice is endless and miserable, and the most bitter is the people of all countries in the world!