THE downgrade to America's credit rating is a historic assault on the superpower's prestige and a symbol of the changing world order: that is, the demise of the US and the rise
of China.
Ironically, the Chinese will not be happy about getting the upper hand on the ratings front. China is the single largest investor in US debt. It is sitting on a quarter of all foreign holdings of US treasury bonds. And that $1.2 trillion investment just got stung with its first ever downgrade.
The financial impact, however, of the move by Standard & Poor's is not so menacing. For one, the ratings agency had already said it was considering a downgrade and Wall Street had, to a large extent, anticipated it.
When markets open for trade again on Monday morning, this will be but one of a host of things already rattling confidence. The turbulence on world markets at the moment boils down to two basic factors: one, soaring debt levels in Europe as well as the US, and two, rising fears the world is heading back into recession.
We emerged from recession only two years ago in the wake of the global financial crisis - "we" meaning the world, not Australia, whose fortune as a low-debt, big commodity producer for China quarantined us from recession. But the trillions spent by governments around the globe to stimulate a recovery has simply turned into humungous debts.
Governments borrowed to finance their assorted "cash splashes" and stimulus programs. The measures were designed to make people spend more and revive the economy.
Instead, people saved more. Now recovery looks in doubt. Hence the tremendous disappointment and loss of confidence in world markets over the past couple of weeks. These concerns dwarf the S&P downgrade, which is largely symbolic. S&P's two rival credit agencies, Moody's and Fitch, had already announced they would keep their triple-A ratings.
Moreover, the ratings agencies are struggling to regain credibility following their "colossal failure", as one congressman described it, during the financial crisis of 2008. Before the stockmarket boom, only the cream of sovereign states and a handful of big blue-chip banks attracted triple-A ratings. In the boom years, though, the agencies began to sell triple-A ratings to investment bankers for their financial products. It famously emerged at a congressional inquiry that they would "rate a cow" if paid.
There will be some direct financial market implications of the S&P downgrade. Many investors are bound by rules and charters which restrict them to holding triple-A-rated investments. And as the rating on US government bonds, according to one agency, has now been lowered there will be some tweaking of investments and portfolios.
Overriding this, however, will be the fact the US has become even more of a "safe haven" for worried investors during the turmoil of the past week. US bonds, despite the S&P downgrade, were the world's best performing investments last week. As share markets dived 5 per cent to 10 per cent around the world, US bonds rallied by the same magnitude.
The paradox is - and S&P has just reaffirmed this - the US is higher risk these days still, in the past week when people hit the panic button they still sent their capital to the US.
In the longer term, many will dread China's rise. It has often been said that "whoever controls the debt controls the asset". And if China began to sell down its $1000 billion holding in US treasuries, the world would really have a problem.
Who owns what
PERCENTAGE BREAKDOWN OF GLOBAL STOCKS
USA
40%
RUSSIA 1%
INDIA 1%
ITALY 1%
SPAIN 1%
CHINA 2%
BRAZIL 2%
GERMANY 3%
FRANCE 3%
AUSTRALIA 3%
CANADA 5%
BRITAIN 7%
JAPAN 8%
SOURCE: THE NEW YORK TIMES
Frequently Asked Questions about this Article…
What happened with S&P's downgrade of the US credit rating and why does it matter for investors?
Standard & Poor's downgraded the US sovereign credit rating, a symbolic blow to America's prestige. For investors it matters because some funds and charters restrict holdings to triple‑A assets, so portfolios and rules may need tweaking. Financially the move was partly anticipated by markets and came amid larger worries about global debt and recession risk.
Why did S&P downgrade the US credit rating — was it because of US debt?
S&P pointed to soaring government debt and rising doubts about economic recovery as key reasons. The article says governments worldwide borrowed huge sums to stimulate growth after the financial crisis, leaving many with 'humungous debts' that undermined confidence and contributed to the downgrade.
How much US debt does China hold and why is that important to investors?
China is the single largest foreign investor in US Treasuries, holding about $1.2 trillion — roughly a quarter of all foreign holdings. That concentration matters because if China ever began a large sell‑down of Treasuries it could create significant global market stress.
If S&P downgraded the US, why did US bonds rally and act as a ‘safe haven’?
Despite the downgrade, investors fled riskier assets during the market turmoil and bought US government bonds, driving them to be last week's best performers. The article highlights the paradox that even if perceived as higher risk, US Treasuries still attract capital when investors panic, so they function as a safe haven in practice.
Will Moody’s and Fitch follow S&P and downgrade the US too?
According to the article, Moody's and Fitch had already announced they would keep their triple‑A ratings for the US. So, at the time of the story, the downgrade was specific to S&P and had not been mirrored by the other two major agencies.
What are the broader market risks highlighted by the downgrade for everyday investors?
The article points to two main risks: very high public debt levels in the US and Europe, and growing fears of a return to recession. Those concerns are driving volatility in share markets and could force some investors to rebalance portfolios if rules require triple‑A holdings.
Does the downgrade mean ratings agencies are unreliable for investors?
The piece notes that ratings agencies have struggled to regain credibility since their 'colossal failure' in the 2008 financial crisis, with criticism that they once sold top ratings too freely. Investors should be aware that ratings are only one input and that the agencies' track record has been questioned.
Who owns the world's stocks and how concentrated are global markets?
The article cites a New York Times breakdown showing heavy concentration: the USA accounts for about 40% of global stocks, followed by Japan (8%), Britain (7%), Canada (5%), and smaller shares for countries like Australia, France and Germany (around 3% each). Emerging markets such as China, Brazil and India are shown with much smaller percentages in that snapshot.
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