Could the US regain AAA rating if it loses it?

Both Canada and Australia have restored lost “AAA” credit ratings © AFP/File Karen Bleier

AFP

WASHINGTON (AFP) – If the United States is downgraded over its vast debt and widening deficits, Americans may be cheered by the examples of Canada and Australia, which both restored lost “AAA” credit ratings.

But others that lost their top-notch debt ratings have found it extremely difficult to climb back.

Standard & Poor’s took away Canada’s AAA rating on debt denominated in foreign currencies in 1992.

But Ottawa recovered the grade in 2002 after reducing government spending as a fraction of GDP by more than eight percent, through a series of stringent spending cuts. (Canada’s sovereign debt as denominated in Canadian dollars was never downgraded.)

Australia may be a harder example to follow. S&P removed Australia’s AAA in 1986 and only gave it back 17 years later.

During that time Canberra adhered to strict budgetary discipline and even capped its debt, measured in Australian dollars, in 1997.

It also benefited from rapid growth and a broad transformation of its economy, modernizing its financial system and deregulating uncompetitive sectors. Meanwhile demand from a resurgent China drove a boom in the Australian mining industry.

S&P cut Japan’s AAA rating in 2001, and since then the debt-ridden country has descended to AA-. But Japan’s borrowing costs did not rise immediately after the first cut — suggesting that a US downgrade might not be catastrophic.

Tokyo’s lenders — who are mainly domestic — continue to buy its debt today even though Japan’s debt-to-GDP ratio is a colossal 225.8 percent, the largest of any country.

More recently, three European countries were in the AAA club before being booted out: Ireland from 2001 to 2009, Iceland from 2005 to 2008 and Spain from 2003 to 2010.

All three benefited from speculative real estate bubbles that swelled tax revenues, until the bubbles popped.

Ireland, now rated BBB+ by S&P, has not been able to tap credit markets since 2010. Iceland, at BBB-, successfully issued bonds only in June after three years of no access to commercial credit markets.

Madrid retains a respectable AA rating, but jitters in the bond markets over its debt load has sent the risk premium on Spanish bonds — the extra return demanded by investors compared to safe-bet German debt — to a euro-era record of 407 basis points.

© AFP — Published at Activist Post with license