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US credit rating drops with the markets

Published time: August 06, 2011 02:27
Edited time: August 07, 2011 11:11

United States, Washington: The US Treasury on August 5, 2011 after Standard & Poor's cut the US credit rating for the first time in history (AFP Photo / Nicholas Kamm)

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The US has lost its top-level triple-A credit rating for the first time since 1917, after Standard & Poor's downgraded it to an AA-plus, with an even lower AA rating on the horizon.

­The decision comes after the White House and lawmakers reached an agreement over raising the debt ceiling that Standard & Poor's says fell short of what would be necessary to stabilize the government’s debts.

Standard & Poor's stated that the outlook on the US’s long-term rating is also negative, and there is a possibility that its credit rating will be downgraded to AA within the next two years, if they see less reduction in spending than was agreed upon, higher interest rates or new fiscal pressures during that period.

On Friday America's financial center, Wall Street, closed out its poorest week in more than two years. Even the reported gain of 117,000 jobs did little to boost investors’ confidence.

Standard & Poor's is due to release separate ratings for US funds, government-related entities, financial institutions, insurance, public finance and structured finance sectors on Monday, the ratings agency announced.

Despite the downgrading of America’s credit rating, this point in time there is no real alternative to the dollar, economist George Koo told RT.

”There is not any real viable alternative to investing in [the] dollar for those who are looking for safe investments,” he said. “All the other currencies, whether it is a Japanese yen or the euro or others, do not quite have the capacity to take it on.”

”And the US has such a long run that it is going to be very hard to switch all of it overnight,” Koo added. “I think you will see a gradual diversifying into other currencies.”

­No investor worth his salt pays much attention to agencies’ ratings, but what is inevitable is that the US is heading for a certain default, believes author and investor Jim Rogers.  

“Eventually, the US will default, there is no question,” he said. “That is why people are moving away from US government bonds because everybody knows that the US is in serious trouble and the debt situation is getting worse and worse.”

Jim Rogers added that the US economy has not really recovered from the crisis of 2008, and the recession is still ongoing. 

“Unemployment in America is still higher than it was in 2008,” he said. “The American debt has skyrocketed and gone through the roof. America is in worse shape now than it was before.”

­Russia remains confident in the US currency and will not review the amount of reserves it holds in US dollars in the wake of the US credit rating downgrade, Russian Deputy Finance Minister Sergey Storchak said on Saturday. Storchak does not see the big difference between AAA and AA+.  He considered the downgrade as “soft”.

“The US debt market remains the most liquid and one of the safest,” he said.

Storchak says the downgrade was a signal for America, first and foremost, not for investors. “The signal has rung, but this is a signal not for investors, but for borrowers. And we, as investors, understand that this was a signal for borrowers,” he said.

Russia keeps 47 per cent of its foreign currency reserves in US dollars, 41 per cent in euros, and nine per cent in British pounds.

Meanwhile, EU leaders are blaming the US rating agencies for a double standard, saying the attitude of the major credit rating agencies when they refer to US debt is different from what they see when it comes to European countries.

EU leaders were in particular furious about Standard and Poor’s recent decision over the US’s rating. Long talks which S&P held with the White House before the decision allowed the White House to prepare a smooth response to the media and even question the agency’s judgment. None of that happened last week when the agencies downgraded EU countries.  

Europe is currently exploring the idea of creating a competing rating agency.

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