US loses AAA credit rating, the world’s lost its banker and we’ll pay


By DAN ATKINSON

America’s lost top-notch bond rating threatens a new worldwide credit crunch for both businesses and governments.

The bedrock of the global credit market – Washington’s prized IOUs – has been shattered with nothing to take its place.

That means the world’s stock of top-quality security against which loans can be raised has been drastically shrunk.

It means also that governments everywhere, including Britain, will find major investors such as the Chinese reluctant to buy sovereign debt, preferring to put their money into hard assets such as commodities, agricultural land and mines.

This weekend’s U.S. downgrade by Standard & Poor’s sent shockwaves around the world, despite being not entirely unexpected.

As a rule of thumb, countries stand to lose the coveted triple-A credit rating once their national debt comes close to or exceeds 100 per cent of annual national output. The 11th-hour deficit-reduction deal struck by Congress a week ago failed to avert this prospect, although there had been hopes that America’s unique economic clout could make it an exception to the downgrade rule.

These hopes have now been dashed.

At any time, the downgrade would have been a huge event. But coming at a time of turmoil in the eurozone, with the sovereign debt of over-borrowed members of the single currency coming under sustained attack, S&P’s move could tip markets worldwide into uncontrollable chaos.

Pressure was mounting last night on France, the current G7 president, to call an emergency meeting. Italy, one of the countries under attack, is pressing for such a crisis summit.

Meanwhile, experts were digesting the implications of the first-ever American debt downgrade, pointing out that, unlike with a currency devaluation, the downgrading of one bond does not automatically mean the upgrading of another – it is quite possible for all government bonds to be downgraded at the same time.

‘The implication of the downgrade is that American bonds are less valuable as security for loans than they were,’ said Jan Randolph, head of sovereign risk at independent consultancy IHS Global Insight.

‘It is logical that lenders will say, “Actually, you have to stump up more American bonds for the same amount of borrowing”. If that happens, we have a credit crunch.

‘It may not be as bad as the one that followed the Lehman Brothers collapse in 2008, but we will feel the strain.’

Chancellor George Osborne has been following developments from his family holiday in Los Angeles.

‘Should America’s rating – now AA+ with a negative outlook – persuade investors to shun sovereign debt, experts warn that Britain will have to offer higher rates of interest on its own bonds. This would be a double whammy for the British public.’

Last night, a Treasury spokesman said both the American debt downgrade and the turmoil in the eurozone vindicated Britain’s tough deficit-cutting stance.

‘Because of the decisions the Government has taken to deal with our debts and support a sustainable recovery, Britain’s credit rating has been reaffirmed, helping to keep the cost of borrowing down for taxpayers, homeowners and businesses,’ he said.

But should America’s rating – now AA+ with a ‘negative’ outlook – persuade investors to shun sovereign debt, experts warn that Britain will have to offer higher rates of interest on its own bonds.

This would be a double whammy for the British public. As taxpayers, they would face higher interest on public debt and as borrowers and mortgage-holders they would face higher interest rates, as bonds are the benchmark for other lending.

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