Downgrading United States' Credit Rating Is Warning Bell for Government

For the first time, the American ratings company Standard & Poor’s (S&P) lowered America’s long-term credit ratings from the highest AAA level down one step to AA+.

Despite the 1971 Nixon shock, ending financial exchanges with the dollar, high confidence in the country kept attracting the world’s money. However, due to the 2008 Lehman shock, trust in the American financial system has dramatically dropped. On top of that, America’s credit rating has dropped below that of the United Kingdom, Germany and France, and can no longer be called the world’s safest financial asset.

Downgrading America’s credit is an event that symbolizes the shaking of the trust of countries that hold reserve currencies in U.S. dollars. It also shows the deterioration of the investment that has been seen in the world financial market as “almost without risk.”

Even after the downgrading, there is no change in the rich liquidity of American investment targets. It is difficult to imagine a situation in which investment capital suddenly disappears, America’s credit crashes and long-term interest rates suddenly jump. However, there is the possibility that instability of the global financial system will continue to grow.

In Europe, banks that have maintained AAA status, such as the United Kingdom and France, are processing losses in appropriation to downgraded Greek debt. Interest rates for supplying short-term funds between banks have risen due to suspicion of the contents of assets.

This kind of insecurity in Europe amplifies growing anxiety of the economic slowdown in America, perpetuates a strong yen against a weak dollar and drastically lowers global stock prices. If market insecurity continues, it can have a bad influence on the real economy.

In downgrading America’s rating, S&P pointed out that “ … the downgrade reflects our view that the effectiveness, stability and predictability of American policymaking and political institutions have weakened … ”

Putting off a dramatic solution to the economic crisis is a stance shared by both the United States and Europe. In Europe, countries like Greece look to an unmotivated Germany for assistance. In the United States, in order to raise the federal debt ceiling, they established a law to reduce the budget deficit. However, the gap between the Democrats and Republicans is large concerning tax increases and benefit cuts, and the specific path towards deficit reduction remains unclear.

First, the government needs to show a resolve to seriously tackle economic reform. Also, without clear problem-solving from a nonpartisan group that includes opposition parties, it will be difficult to restore trust in the financial markets.

The issue raised by lowering America’s credit rating is the problem of how the government ought to be. That issue will continue postponing post-collapse reconstruction, and is a warning bell for Japan, whose financial deterioration has been far worse than that of Europe and the United States.