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Can America Regain its AAA Rating?

[Finance, Investing & The Economy]

America's AAA Rating Has Fallen to the Wayside

On Aug. 5, 2011, Standard & Poor’s (S&P) Rating Services lowered its long-term sovereign credit rating on the United States of America to AA+ from AAA. S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn’t do enough to address the gloomy outlook for America’s finances.


Credit agencies and politicians do not necessarily dictate which direction markets will take, and the credit downgrade may ultimately create a reaction from the U.S. that fuels a market move higher.


It is worthwhile to consider what happened to Canada in the early 1990s, as its own credit downgrade was not a forbear of tragic times, but an epilogue to them. What followed was actually a rather strong period for equity investments in Canada; even more so than the foreign equity benchmarks. From March 31, 1993, to Dec. 31, 2001, the Canadian Index (S&P/TSX Composite Index) gained 113% while the MSCI World Index gained 80%.


Over the last 30 years, 10 of the world’s nations lost their AAA rating by S&P because of domestic economic problems. Five countries — Australia, Canada, Denmark, Finland and Sweden — eventually gained it back, with the record of reinstatement going to Canada after nine years. There’s nothing to prevent The U.S. from repeating what these nations accomplished, but much has to be done before S&P might be inclined to re-evaluate its opinion of U.S. debt.


In the early 1990s, Canada, which had regularly run fiscal deficits since the 1960s, stood out among the G-7 as having the most foreign indebtedness.  From the beginning of 1990 to the end of1993, Canada experienced a long slide in economy activity and employment and the country lost its AAA rating in 1993. Facing an unprecedented fiscal crisis, the Canadian government focused on debt reduction. The country passed a landmark budget in 1995 that reduced government spending by imposing wage freezes, overhauling its pension program, and cutting government and civil service programs by about 25%. The plan tilted heavily towards cutting expenditures but also included some new revenue (a ratio of about $7 in cuts for every $1 of revenue). Canada is now on much more financially sound footing; S&P restored its AAA rating in 2002. The turnaround is now referred to, in some economic literature, as “The Maple Leaf Miracle.”


In almost every instance in which a nation recovered its AAA rating, economic problems were solved by raising taxes and cutting entitlement programs and benefits. About half of Denmark’s deficit was reduced through increasing revenue — taxes. Finland added a value added tax to reduce its deficit and devalued its currency to help it compete in global markets. Besides cutting social benefits, Sweden increased income and payroll taxes. Australia consolidated its debt, cut expenses and raised revenues.


The bottom line is that U.S. political parties need to begin working together to enact reform on entitlement spending and devise a fiscal consolidation program that will put us back on the path to AAA.


Raymond C. Baker Jr. is TPC Finance, Investing & The Economy Editor, a category in which financial professionals are invited to submit articles.

Ray Baker is Chief Market Strategist and Portfolio Manager with  Wespac Advisors.  Baker has been a life-long professional in the Financial Markets.

Do you think the Euro can survive? Just wondering what the consensus is out there...
Jul 30, 2012
I still find it amusing that France has a AAA, any thoughts?
Jul 26, 2012
I wonder, should we be hopeful that, after the elections, the political parties will be able to come to an agreement? Good article and very interesting about how other countries have regained their own AAA rating. I don't think this is commonly known.
Jul 26, 2012 - Unique Tools for Frequent Flyers