Saturday, August 6, 2011

US Credit Rating

From Talking Points Memo:

From the S&P release ...

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

I am skeptical, as I said to Mark, that this measure will influence other countries all that much. Japan switched to AA+ and that did not hurt the US, rather it helped. What it really does it mean about 55% of the AAA sovereign debt in the world just vanished. The UK, Canada, Sweden . . . all of these countries are about to pay a lot less for their debt. That actually makes them more creditworthy and not less so so.

By the way, what do all of these countries have in common? They are willing to raise taxes to pay for debt. I remember when Canada began paying down its debt via a national sales tax. Unpopular as the move was, it moved the country firmly into surplus and prevented a ratings cut.

It is quite possible for a country to pay down their debt via internal revenue generation. The survivors on the AAA list are the countries that have been willing to make hard decisions to raise revenue rather than appeal for help.

1 comment:

  1. Perhaps, but I have to wonder what effect a US economic collapse would have on Canada.