Will U.S. be Next to Receive Credit Warning?

The biggest story in the currency market this morning is news that Standard and Poor’s has put the U.K.’s Sovereign Debt rating on negative credit watch. This means that the U.K. now has a 1 in 3 chance of losing its prized AAA rating. I have written an extensive article on what this could mean for the British Pound and if the threat is is serious on FX360.com.

Instead, I think it is more interesting to talk about whether the U.S. could be the next country to receive a credit warning. According to the comments by the S&P, their fear is that debt in the U.K. could hit 100 percent of GDP in the near term. Yet the U.K. is not the only country to be up to their ears in debt. The IMF released a report in April that projects U.K. debt load to be at 66.9 percent of GDP compared to 70.4 percent for the U.S. and 69 percent for the Eurozone. The following chart shows the IMF’s estimated government debt as a percentage of GDP and it is clear that the U.K. is not running the highest debt load (click on image to enlarge).

Source: WSJ

Source: WSJ

S&P is starting to examine more G10 nations and there is a decent chance that the U.S., Germany, France, Italy, and Japan could come under review as well. There are major consequences to downgrading U.S. debt or even just putting on credit watch. I think that a physical downgrade of U.S. or U.K. is unlikely. The U.S. dollar is the global reserve currency and S&P may not have the guts to say that the “Emperor has no clothes.” This is one area where being reactive rather than proactive can actually benefit S&P.

Last week, in my article “Could America Really Lose Its Triple A Rating?,” I said “I think that ratings agencies talk a good game but they will problems following through. The consequences of downgrading U.S. sovereign debt is huge both politically and economically. Therefore Moody’s or any rating agency for that matter may be reluctant to the first to pull the trigger. Downgrading the U.S. is very different from downgrading Ireland. Based upon how the rating agencies have handled the credit derivatives bubble, chances are they will be behind the curve once again.

With that in mind, U.S. finances are deteriorating significantly, raising the concern of Asian nations. However if President Obama is successful at turning around the U.S. economy, America will be well equipped to meet its debt obligations.

Kathy Lien

Leave a Comment

Your email address will not be published. Required fields are marked *