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Standard & Poor Warned U.S. of a Possible Downgrade in its Credit Rating

What does this tells us and what does this mean to you?

First, the story. Reuters reports

“Standard & Poor’s threatened Monday to downgrade the United States’ prized AAA credit rating unless the Obama administration and Congress find a way to slash the yawning federal budget deficit within two years.”

Read Reuters comprehensive news report dated April 18, 2011 here. LINK

Second, to further understand what does it mean, let’s define first what is what???

What is Standard & Poor’s? It is a credit rating agency (CRA) that provides credit ratings, as a guide for investors, for the debt of private and public companies including governments. It’s basically an institution that tells who are the good payers and bad payers of debt.

Currently, the US is rated AAA , the highest rating (Categorized as best quality borrowers. They are reliable and stable).

Our beloved Philippines is rated BB+ (a non-investment grade. More prone to changes in the economy)

In Layman’s terms, S&P is similar to a person who investigates your background and financial capacity to pay, when you borrow money or take out a personal loan. So if you imagine yourself you have a AAA rating, it means you pay back your debts properly and in good terms. Get the idea?  🙂

What does it mean to you and me?

Well it really depends.

It could mean a lot of problems to you. And it could also mean Nothing! Let’s explore more…

The warning was spawned by a growing US federal budget deficit. Budget deficit is an excess amount of expenses more than the income. In other words, it’s a result of overspending more than what is earned. Budget surplus is the complete opposite. There is a surplus because expenses are lower than the income.

To cover for the deficit, an individual, a business, or a country borrows money or uses debt. The problem is not actually debt itself but how debt is handled.

Now, S&P says it would lower it’s credit rating unless the US find means to lower this deficit in two years time.

A Simple Illustration

If you defaulted in your credit card, or loan payments, you’ll have a bad credit standing. You’ll have a bad record and probably will have a hard time borrowing money again from banks or financial institution. If you fail to pay borrowed money to your family, relatives and friend, you’ll probably ruin the relationship involved.

Now imagine a country unable to make its payments to creditors and investors? That’s what’s troubling America and the US dollars.

What does this mean to you?

Find out in the next blog post. Okay? 🙂

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Reuters News Report April 18, 2011
Standard and Poor’s Wiki Page on Wikipedia
S&P Ratings – Philippines

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