August 9, 2011
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Is our country going to start getting calls from debt collection agencies, or have to check its credit reports periodically? Here's a funny video of how the rest of us have to handle debt problems.
By now, you've probably heard that the Standard & Poor's debt rating agency has downgraded all U.S. government debt with more than a year of maturity, from the top AAA rating down to AA+. To put that in perspective, now only 17 countries enjoy the AAA rating on their government bonds. Typically, that means that they are considered the safest havens for cash, and therefore are able to pay the lowest interests rates on their borrowing.
Here's the list, and we've included the current yields on each country's 10-year government bonds in parentheses. This lets you see what the top-rated countries pay on their debt, compared with the 2.34% interest our government has to pay on its 10-year U.S. Treasuries:
France (3.41%), Germany (2.83%), Canada (2.93%), Australia (5.75%), Finland (3.19%), Norway (3.29%), Sweden (2.82%), Denmark (3.06%), Austria (3.30%), Switzerland (1.53%), Luxembourg (NA), Guernsey (NA), Hong Kong (2.29%), the Isle of Man (NA), Liechtenstein (NA), the Netherlands (3.17%), and Great Britain (3.11%).
The first thing to notice is that our U.S. government is still borrowing at very attractive rates compared with the triple-A nations, and Treasury rates actually got better during the angry debate in Washington, as investors continued to beat down our doors to lend money to our government. Why? The downgrade and recent weakness in the stock market have made bond investors nervous, which usually causes them to buy the safest paper they can find. As an Associated Press report notes, the U.S. still offers the deepest and most liquid bond market in the world.
The second thing to understand is that, despite the high levels of government debt, there is really no crisis in the government finances or in the economy. S&P officials made it clear that they were more influenced by the recent messy debate in Congress than the fundamentals of government finance. They may have been particularly rattled by public statements by key members of Congress that it might not be a bad thing if the U.S. government defaulted on its sovereign obligations to its global lenders--sort of like one of us telling the bank that we're thinking seriously about not making any more mortgage payments. David Beers, global head of ratings at S&P, said in a supporting statement that the agency was concerned about "the degree of uncertainty around the political policy process." A separate statement by the rating agency said that policymaking and political institutional control had weakened "to a degree more than we envisioned."
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