There will be endless debate on whether Standard & Poor’s, the rating agency, was justified in stripping America of its triple A rating and – adding insult to injury – even attaching a negative outlook to the new double A plus rating. But this historic action has taken place, and the global system must adjust.
Not so long ago, it was deemed unthinkable that America could lose its triple A. “Risk free” and “US Treasuries” were interchangeable terms – so much so that the global financial system was constructed on the assumption that America’s triple A was a constant at the core, and not a variable.
Global financial markets reopen to a changed reality. There are immediate operational consequences, from recoding risk and trading systems to evaluating collateral and liquidity management. Important market segments will be closely watched, including the money market complex and the reaction of America’s largest foreign creditors. In the real economy, credit costs for virtually all US borrowers will be higher over time, and animal spirits, already hobbled by the debt ceiling debacle, will again be damped – constituting yet another headwind for growth and jobs.