Debt Downgrade

The economic impact of the S&P downgrade

Marketplace Staff Aug 6, 2011

Tess Vigeland: What a week, huh? How y’all doing? We thought the market nuttiness would finish out the week, but no, Standard & Poor’s had a different idea. Late Friday it downgraded the credit rating of the United States from AAA to AA+. We’ve asked our New York bureau chief Heidi Moore to help parse what this means. Hi Heidi.

Heidi Moore: Hi Tess.

Vigeland: All right, so the U.S. has had its credit rating downgraded by the S&P. I don’t know, is this like us tanking our credit score as consumers? How worried should we be about this? Time to hit the panic button yet?

Moore: Sure. Well, it’s not great for us. It’s definitely going to be a little bit more expensive for us. If you have a mortgage, if you have a car loan, if you have a student loan — any kind of debt — you’ll probably see the interest rate tick up a little bit.

Vigeland: And why is that?

Moore: Well what has happened with the credit score being cut is basically we’re going to have to pay more in an interest rate to finance our debt as a country. And when the whole U.S. pays a higher interest rate, so does everyone in it. So if you have a mortgage, if you have a car loan, if you have a student loan, you’re going to see your interest tick up. Hopefully, if everything remains rational, it won’t be too much because we’ve seen this coming for four weeks. This isn’t a big surprise. Nobody woke up this morning and realized we could be downgraded. So hopefully, it will all be in a nice, rational progression from here until we get our house in order.

Vigeland: Well, you’re ascribing rational progression to a system that showed us this week that it’s completely irrational. So when we look at this kind of adding to the pressures of what’s happened over the last week, what is Monday going to look like? Do we have any idea what’s going to happen over the next 72 hours?

Moore: We probably don’t know, but what we do know is because all of this has been talked about for about four weeks now, people in the markets are completely rung out. Right? They’re humans like everyone else. So they’ve been thinking about a downgrade for four weeks, they’ve had time to prepare. The next couple of days may give them some more time to think, but they can’t do anything about it. They can’t really trade anything until Monday. So maybe by that time, everything will be a little bit more rational. And I know that that sounds weird, but consider that we are the world’s only hope right now. If you think we’re irrational, look at Europe!

Vigeland: You know, you and I talked on Thursday after that crazy day on Wall Street, and I asked you: What are you doing with your money? And you said, “You know what, I’m sitting tight.” Well 24 hours later, we had this downgrade happen. Anything change for you?

Moore: Nothing changes for me. But if you’re a consumer and you have Treasury bonds, you have municipal bonds, you have any kind of bonds in your portfolio, you might see some changes. But what we see — even in the biggest market changes — is that over time they shake out. And over time, the markets get even better. So it really doesn’t pay anybody to sell right now because they’re just going to take losses, and there’s a chance that they could rebound.

Vigeland: All right, thanks so much Heidi.

Moore: Thank you.

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