Why the US Credit Rating is Safe

With the ever increasing debt of the United States, people have begun questioning the ability of the government to pay it back. Some even suggesting that ratings agency's like Moody's and S&P will down grade our credit rating. The credit rating is important for a couple of different reasons. First, a downgrade will shape the rest of the worlds outlook on our economy and our debt. Second, It will make it more difficult for banks to hold as much of our debt on their balance sheets due to the net capital requirements provisions in the securities and exchange act of 1934. This provision says that banks do not need to hold as much collateral on their books if the ratings agency's rate the debt as AAA. The overall outcome of our credit rating being decreased would be that it will cost us more to borrow. In essence we will be on our way to becoming like Greece. Greece's main problem is their debt is so large that their is no way of paying it back without either defaulting or restructuring their debt. The other alternative in Greece would be to inflate away their debt but since they are part of the Euro the Germans will never allow that to happen since it would mean inflation there as well.

Here is why Moody's and S&P will not down grade the US before after it is too late. Moody's and S&P are Nationally recognized Statistical Ratings Agencies. The United States currently recognizes 7 of them along with Fitch and 4 others. The US also has the power to delist ratings agencies from this list. And Since all new debt issues need to be rated by a Nationally recognized ratings agency any threat to that would be a huge threat to a ratings agencies profitability. This is a risk that the ratings agencies should not take lightly. Now if it were up to me I would get rid of these perverse incentives but since we have the leverage if I were president I would make sure that the ratings agencies knew my position. We have the power, we might as well use it.