World Shudders Yet Again


On Friday, August 5th, 2011, Standard & Poor, one of the three credit rating agencies have downgraded sovereign rating of United States of America.

The sovereign credit rating downgrade from the top most AAA rating to AA+, for the first time, was culmination of what S&P termed “political brinkmanship” that made the US governments ability to manage its finances “less stable, less effective and less predictable”.  In the  run up to the announcement newspapers around the globe had reported that the US treasury was just about broke. Down to US$ 58.6 billion in cash and US$ 130.5 billion in available credit, the Obama Administration had to go on its knees with the Republican controlled Congress to raise the debt ceiling.

Announcing the unprecedented move the S&P officials said it considers the administrations efforts to tackle soaring debt levels as inadequate”. It also mentioned that US will not regain its top credit rating soon. It warned of further downgrading to AA level. (The AAA rating represents the highest level of confidence given to an economic entity’s ability to meet its financial obligations)

The other two global rating agencies – Moody’s and  Fitch that had retained their AAA ratings of the US following the debt ceiling restructuring last week, now may not have options, but to follow suit as S&P. On the face of it, what this rating downgrading by S&P simply means is that this would make the debt ridden US’s borrowing costlier.

The Obama Administration reacted with indignation, noting that S&P had made a significant mathematical mistake in a document that it provided to the Treasury Department on Friday, overstating the federal debt by about $2 trillion.

But the fact remains that US government operates in deficit. That is, the money it collects in the form of taxes (among other sources of income) is less than the money it owes to suppliers, its citizens (social security), its employees and the banks from which it borrowed money. The gap between how much money flows into its coffers and how many needs to come out of it is the ‘size’ of this deficit.

What is the size of the US’s deficit?

The cash inflow of the US government is short of its outflows by about US$ 1 trillion every year. The deficit figure is most likely more and it sure is ‘BIG’.

The cat has now been belled but fears are ripe of another recession in the US and a debt crisis in Europe, which could result in another global financial meltdown. Within days the repurcussions are felt across the globe. For once it has pull down the bourses across the globe and sent the West Asian markets in a tailspin. US$ 2.5 trillion was wiped off the investors wealth in matter of hours.

The Indian market has also been severely affected with a loss of Rs. 4 lakh crore in 4 hour of trading session. As one of the 15 largest foreign creditors to the US, India’s exposure is estimated at US$ 41 billion (Rs. 1.83 lakh crore).  The Indian IT Industry is surely expected to take the brunt. The US accounts for 60 per cent of the revenues for the US$ 60 billion Indian IT Industry. The downgrading will also lead to further appreciation of rupee against the dollar thereby blunting the Indian IT industry’s competitive edge too.

This time China as the single largest holder of US treasury securities, with US$ 1.5 trillion, is expected to also take the brunt.  The World Leaders are huddled up to discuss ways and means to tackle the situation. The situation is unprecedented. It is still early days to know what is in store for the days to come.

 

Watch the Video for a simple explanation of Uncle Sam’s Debt Crisis

Video : Courtesy YouTube

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    • KK
    • August 10th, 2011

    Very Informative Video!!!

    Liked the writing too…keep writing!

    Like

    • Sowmya
    • August 10th, 2011

    Good informattive writing and video!!
    Hope too see more such educative articles.

    Like

  1. It all started in 1971 when USA unilaterally cancelled the direct convertibility of the dollar to gold and “persuaded” Saudi sell oil only in US dollars. As a result, rest of the World started hoarding dollars so that they can buy oil from OPEC. Now due to Globalization, Americans have to compete with rest of the World to earn US dollars.

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