USA Downgraded from AAA to AA Debt Rating!

Usa has been downgraded in its debt rating.

What does this mean?

I dont really understand it all yet.

What does this mean for the world?

Whenever USA farts the rest of the world gets a bad smell up its nose.

Personally i am rather worried.

www.cnn.com/2011/BUSINESS/08/06/global.economy.cnn/

Possibly the end of the world as we know it.

What they need to do is borrow from portugal, ireland, Italy, greece, spain - after all it's all only on paper - each lending to the other in a time of need - all propped up by IOUs.

BigWilly (lol, my wife is right, I am puerile),

It´s similar to a credit reference agency like Experian or Equifax scoring you on points on your ability to repay any loans. If your score is good you´ll be able to finance a new car, if it´s poor you might find you are unable to get a mobile phone on contract. Moody´s, Fitch, Standard & Poor etc rate the abilities of companies and governments to repay their debt.

A country with an AAA rating (like Germany) can fund itself on the international bond market far cheaper than say a country with an AA2 rating (Spain) or BA2 Portugal.

Yields (interest rates) countries have to pay on their 10 year notes:

http://www.bloomberg.com/apps/quote?ticker=GDBR10:IND Germany 2.35%

http://www.bloomberg.com/apps/quote?ticker=GSPG10YR:IND Spain 6.04%

http://www.bloomberg.com/apps/quote?ticker=GSPT10YR:IND Portugal 10.97%

I´ll put Greece in for a giggle, it is the weekend:

http://www.bloomberg.com/apps/quote?ticker=GGGB10YR:IND Greece 15.24%

As anyone without a fixed rate mortgage will tell you, there´s a whole world of difference (and pain) between paying 2.5% interest on your mortgage and 5.5% interest, so you get a good idea of the trouble that Spain is actually in. And remember these bond auctions are for billions of euros of debt. You reach the point where income can´t even cover the interest repayments.

I remember reading that in the US a lot of mortgages are pegged to the yields on US treasury bonds in a similar way that Spanish mortgages are pegged to the euribor. Investors will want higher interest rates to hold US debt which in turn will push up mortgage repayments for millions of families in the States. Of course that is just one repercussion of the US having its credit rating dropped a notch. Hedge funds, pension schemes etc have to hold a certain amount of AAA rated financial products so that risk is spread, so they may start to sell off some of the US treasury bonds and replace them with other AAA rated products. Some people expect the Dow to plummet on Monday morning but honestly, S&P have been talking about this for weeks, I don´t think it is a huge shock and the sell off last week was probably in anticpation of this.

Wikipedia will undoubtedly provide a far better synopsis of credit rating agencies than I ever could:

http://en.wikipedia.org/wiki/Credit_rating_agency

Hope that helps a bit.