Why Despite Debt Downgrade the US Stocks Have Appealed the Economy?

PartnershipCelina Jones is a skilled economist with years of experience. Working with the government has given her sufficient exposure to the current economic problems. For any other debt related issues, the info at www.consolidatedcredit.org gives great insight into what makes a great debt management program.

The debt burden is a global problem nowadays. Most countries are suffering from debt or are unable to handle their fiscal problems, impacting their economy and other financial aspects of the country as a result.

What is Debt Downgrade?

A debt downgrade is a negative change or a decrease in the rating of a particular security. This usually happens when analysts believe that the security’s future prospects may not be as strong as recommended initially. This can be a result of a fundamental or material change in the operations of the organization, the industry or its vision. Countries have debt management programs and are permitted to tighten or ease their fiscal policies as required using tools like these.

Debt Downgrade in the US

Due to the competition between political parties in the U.S., many credit rating firms in the U.S. believed that the confidence in the ability of the government to manage its financial issues properly seemed to weaken and reduce.

Many credit rating firms like Fitch and Moody’s warned that they may downgrade the U.S. credit rating if the government was unable to find a solution to avoid the fiscal cliff in the economy at the year end. However, Standard & Poor (S&P), one of the three major credit rating agencies of the country, downgraded the rating of the federal government of USA to a rating of AAA to AA+. The rating AAA implies outstanding credit security while the rating AA+ falls below that and implies excellent credit security. The agency has done this for the first time ever in the history of ratings. U.S. was given this credit rating since as long as 1917.

Reasons for Debt Downgrade in the US

The reason that S&P have given for the debt downgrade is that the deficit reduction plan that the government presented did not help in any way to stabilize the debt situation of the country. Moreover, the policy making system is also not efficient enough to cater to the current challenges of the economy.

S&P also stated that the debt-to-GDP ratio of the government was very unsustainable. Also, the lawmakers responsible for controlling the situation were not able to make the tough decisions that were required to rectify the problem.

The Impact of Debt Downgrade on the Economy

One of the major impacts of the debt downgrade would be the increase in the cost of borrowing. The federal government of the U.S. will find borrowing more expensive than it was before the downgrade. The action taken by S&P also left Wall Street surprised and shocked. Most people in the U.S. consider Treasury Bonds to be very safe but were left in shock after the downgrade.

Why Us Stocks have Appealed the Economy

Initially, due to the debt downgrade in the U.S., the 500-stock index of S&P dipped almost 7%. But when things cooled down, the main effect was felt on the financial markets of U.S. the fiscal policies have tightened up and the financial market is now restricted to perform freely.Coworker

Overall, the debt downgrade in the U.S. is an event that has now deflated. The negative results have worn off and the decision of debt downgrade has emerged to be quite positive with positive effect on the bond market.

Conclusion

The recent global financial meltdown left the entire world in a lurch. Every country, including the U.S., underwent the tough phase of recession and had to make difficult choices to cope with the prevailing scenario.

A few instruments were used to rectify the problems that occurred out of which, one was a debt downgrade. This has brought the country’s economy back on track by tightening the fiscal policy and has ultimately had positive implications on the overall economy. The effects of the unprecedented event will diminish with time but have made their mark where they needed to.

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