America's Credit - Is the Government due for a Downgrade?

America depends on its ability to borrow, and to do it cheaply. We borrow by issuing bonds by the billions to countries like China who buys on a regular basis. Soon our government will be faced with trillions in notes that are coming due and some are wondering how we can pay that. Can we roll that into another issue, another ten year note maybe? That is going to be a tough sell if we are now rated as junk. Even if we were lowered to AA or A it will have quite an impact on our ability to borrow and the yields we are able to borrow at. If we cannot pay that debt, what do we do? We certainly can’t go start the inflationary practice of printing money.

One of the big concerns here is the effect that a country down grade would have on the corporate debt markets. According to Moody’s, a municipality or private or public company or corporation cannot have a higher credit rating than its county of origin? Let’s think about that for a minute. Cisco Systems is doing a one billion dollar debt offering to price this week, and their rating is a very respectable Aa. One can only speculate, but what would happen if Cisco, a sizeable market leader got down- graded to junk. Cisco grows through the acquisition of the newest technologies by buying the companies that have already developed the desired technology. Cisco, like a multitude of other companies relies on a steady infusion of cash to grow their companies and gain market share over their competitors. It is necessary to have that open pipeline to cash through the issuance of new debt.

Getting downgraded to junk, even if it is because of the Government's ratings, will force them to issue new debt at a much higher yield in order to keep investors' coffers open. That higher yield on a billion dollars of debt could easily translate into thirty, forty million a year in higher coupon payments.

The economy is largely fuelled by small businesses, and surely they would feel the effect of a country downgrade. If a top rated country like Cisco gets downgraded to junk what is going to happen to America’s small businesses?

Many businesses that had planned to raise capital through issuing bonds could find that impossible or unaffordable now. They would be forced to borrow from banks and most companies do not like doing that. Banks tend to be overly restrictive with the loans they make and it can be difficult to grow your business within those bounds. Banks world-wide have also began shortening the maturities on their outstanding debt in the last five years from 7.2 years to around 4.9 years. That tells me right there that banks worldwide are taking action to lower their exposure to risk. There are always hard money lenders but who can afford double digit borrowing.

I do not pretend to know the solution here, but something is going to need to be done. A default in our obligations will be disastrous to our attempts to pull out this recession. A self sustaining economic recovery needs accelerating employment and income growth. Just the opposite is happening.

The greater the tax base of a borrowing country the better its government’s ability to repay its debt. Personal incomes for Americans are not growing and thanks to easy credit, more and more Americans are living beyond their means. An indebted society does not provide a good foundation for social and political stability.

I wonder how we are going to bankroll the new healthcare program. Issue more debt that we cannot afford to service? You tell me, ‘cause I certainly don’t have the answers.

Good luck and happy borrowing.