Is U.S. credit permanently tarnished by the recent downgrade of its debt by Standard & Poor's? Can the U.S. ever regain its once perfect AAA rating? If history is any guide, the answer to the first question is no. And the answer to the second question is yes.
TUTORIAL: Bond Basics
Many of the world's nations once enjoyed AAA ratings, then lost that rating because of domestic economic problems, but eventually regained it. There's no reason to prevent the U.S. from repeating what these other nations have accomplished. Much has to be done, however, before S&P might be inclined to re-evaluate its opinion of U.S. debt.
The two other major ratings services, Moody's Investor Services and Fitch, have yet to downgrade U.S. debt from AAA. But both firms have warned that a downgrade may occur in the future, depending on economic conditions and how the U.S. government handles its staggering debt. (For related reading, see What Is A Corporate Credit Rating?)
Nations That Recaptured the AAA Rating
- Australia lost AAA rating in 1986, regained it in 2003
- Canada lost AAA rating in 1992, regained it in 2002
- Denmark lost AAA rating in 1983, regained it in 2001
- Finland lost AAA rating in 1992, regained it in 2002
- Sweden lost AAA rating in 1993, regained it in 2004
Countries That Lost the AAA
- Ireland lost AAA rating in 2009
- Japan lost AAA rating in 2001
- New Zealand lost AAA rating in 1983
- Spain lost AAA rating in 2009
- Venezuela lost AAA rating in 1982
How to Regain the AAA
In almost every instance in which a nation recovered its AAA rating, economic problems were solved by cutting entitlement programs and benefits, and by raising taxes.
Canada reduced government spending by imposing wage freezes, cutting government and civil service programs, and reassigning certain national government expenses to provincial governments
About half of Denmark's deficit was reduced through increasing revenue – taxes.
Finland added a value added tax to reduce its deficit and devalued its currency to help it compete in global markets.
Besides cutting social benefits, Sweden also increased income and payroll taxes. A favorable exchange rate also helped increase exports.
Australia similarly consolidated its debt, and both cut expenses and raised revenues.
The American Plan
Members of the U.S. Congress are now debating the methods in a 12-member so-called bipartisan Super Committee by which its debt can be reduced and its AAA rating restored. The committee's mission is to suggest at least $1.2 trillion in budget cuts by this coming Thanksgiving, November 24. The most likely committee scenario, according to many veteran print and broadcast media reporters, is a list of recommendations split along political lines.
Despite the downgrade of American. debt, investors – individual, institutional and sovereign nation – have continued to buy U.S. Treasuries although fed chairman Ben Bernanke has promised there'll be no increase in yields for the next two years. So America continues to borrow as the national debt climbs relentlessly. (For more on Ben Bernanke, see Ben Bernanke: Background And Philosophy.)
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The Bottom Line
When the Fed chairman's moratorium on interest increases expires in 2013, America's economy may be on a major upswing, the country's national debt may be stabilized, under control and being reduced as government spending is cut and revenues increase. Under those circumstances, S&P may restore the nation's AAA rating as it has to the countries mentioned above. But as S&P has done in the past, it can also lower the nation's debt rating even further.
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