Standard & Poor's rattled the global financial markets and riled up the U.S. political forces in April when it placed U.S. government debt on negative credit watch. Though not technically a downgrade - U.S. debt still carries an AAA rating - this was a clear and explicit warning by the ratings agency that the U.S. must get its financial house in order or face a downgrade within two years. (Despite investor distrust, rating agencies can be helpful. Just be sure you use these ratings as a starting point, not an endpoint. Find out more in Bond Rating Agencies: Can You Trust Them?)
While not the first time that the United States' rating has been on negative watch (it happened in 1995-96 as well), it adds another element to already heated debate about the state of the country's budget deficit and outstanding debt burden. What's more, the news was enough to spook stock investors and encourage holders of hard assets like gold and silver.
What Happens If There's a Downgrade?
If the U.S. loses its AAA rating, the most likely near-term impact would be higher rates on U.S. debt. Given that U.S. government debt underpins many other interest rates, it would not be unreasonable to assume that there would be a widespread increase in rates across many other kinds of debt. Higher rates would not change the interest that bondholders receive (unless they hold adjustable-rate debt), but they would find that the price of those bonds would decline.
The full column can be read at the link below:
http://financialedge.investopedia.com/financial-edge/0511/What-SPs-Warning-On-U.S.-Debt-Means.aspx
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