At the precipice of default, S&P has declared a 50-50 chance of U.S. downgrade. A thought experiment: what would be the risk in doubling the debt ceiling?
This morning, the ratings agency Standard & Poor's said again that there is a 50-50 chance the United States' sterling AAA-credit rating could be cut as soon as August.*
I've read a few writers say, Well, the S&P is just a ratings agency. It was wrong throughout the housing bubble. Who cares what it says today?
should. Certain funds promise investors to hold a percentage of AAA
bonds. If the U.S. loses its AAA-rating, these funds might have to sell
off U.S. bonds. The sell-off would drive up interest rates for
government debt, which would trickle down into the economy in the form
of higher rates for mortgages, car loans, you name it.
The U.S. owns or guarantees more than 90% of all new mortgages, and retirement funds, such as pensions and 401(k)'s, are heavily invested in government-backed securities, as Dan Indiviglio pointed out this week. If our largest banks lose their AAA-ratings as well, we'll have a financial crisis redux at a moment of critical weakness for the player that bailed us out the first time -- the U.S. government.