The Return of President Downgrade
The Only President in History to Get a
Credit Downgrade Has Two Downgrades Now
Update - September 19, 2012
It's happening again. For the second time since he took office, President Obama has presided over the credit-rating downgrade of the United States. Credit rating firm Egan-Jones has downgraded its rating of U.S. government debt from AA to AA-, following the Federal Reserve's recent announcement that it was planning yet a third round of stimulus spending — an open-ended plan to buy $40 billion worth of mortgage debt a month.
While Obama has generously awarded himself a "solid B+" after his first 11 months in office, news of this new downgrade has surely earned him at best an "incomplete" — and reinforced the nickname "President Downgrade."
How does this affect you? Read on:
1. Uncle Sam's interest rate may rise.
Credit downgrades by definition are a sign of a lack of confidence in a government's ability to pay its debts. The riskier a country is to lend money to, the higher the rate of interest it must pay – as with consumers, so too with countries. When the country with the best credit rating in the world gets a downgrade, that's a big deal.
2. If your government pays more, you pay more.
The interest rate the U.S. pays for short-term loans is tied directly to the prevailing rate in the Treasury bill market. A downgrade will likely force yields on bonds higher, thereby forcing the government to spend more to borrow the same amount of money. Since consumer loans, such as credit cards and mortgages, are tied to T-bills, their interest rates will rise too.
3. College and car loans.
If you want a loan for a new car or for college tuition, brace yourself for higher rates. If your credit card or home equity loan has a variable interest rate, it's most likely tied to the Treasury bill market. Check the fine print in your monthly statement.
4. What's the worst-case scenario for me?
The downgrade could force some homeowners to default on part of their mortgages, potentially deepening the housing crisis. In economic boom times many people finance their homes with both a standard mortgage and a special home equity line of credit. HELOCS require borrowers to pay only the interest on the loan, with the rate changing from month to month. If Treasury bills become more expensive because of the downgrade, some homeowners, depending on how (over)extended they are, might be pushed into default.
Further Reading:Local Archive