U.S. Poised to Join China, Spain in Double-A Club

By Sue Chang, MarketWatch

SAN FRANCISCO (MarketWatch) — With political gridlock increasing the likelihood the U.S. will lose its coveted, triple-A credit rating, it is poised to join the ranks of sovereign borrowers sporting a double-A stamp, which includes China and Spain.

The double-A club is a diverse group that includes countries wrestling with their own debt crises, or in China’s case, flush with cash. And it’s one that some countries have successfully left.

Double-A is categorized as “high quality” and includes the number two and three economies of the world, China and Japan — both of which rely heavily on U.S. consumers to buy their products.

It’s worth noting that Japan has never missed a debt payment, and China is the U.S.’s is biggest foreign creditor.

Other double-A borrowers include Belgium and Spain, the latter struggling with surging borrowing costs, and the oil-rich states of Saudi Arabia and Kuwait.

Israel and Taiwan, nations that rely heavily on the U.S.’s geopolitical muscle for their security, are also on the list.

If the U.S. loses the triple-A rating, there are reasons to be optimistic — five, to be exact.

Australia, Canada, Denmark, Finland, and Sweden all have, at one time or another, lost their topnotch ratings before working their way back into triple- A.

The threat of a downgrade is pressuring politicians to act on two fronts — lifting the debt ceiling and slashing the U.S.’s long-term borrowing plans.

Republicans and Democrats are attempting to reach a compromise on a bill that would raise the debt ceiling from $14.3 trillion and cut the deficit by Tuesday. After that day, the Treasury has warned the U.S. will have trouble paying its bills. Read latest news on debt ceiling vote

Standard & Poor’s Ratings Services and Moody’s both put the U.S. on notice earlier this month, warning of a downgrade if its debt limit is not raised in time.

Even if the debt ceiling is lifted, a downgrade by one or more agencies seems likely.

“We see at least a one-in-two likelihood that we could lower the long-term rating by one or more notches on the U.S. within the next three months and potentially as soon as early August — into the ‘AA’ category — if we conclude that Washington hasn’t reached what we consider to be a credible agreement to address future budget deficits,” said S&P in a report released earlier this month.

The likelihood of a downgrade has the markets on edge.

A rating downgrade is likely to weaken the U.S. dollar DXY
-0.54% by “at least
another 2 to 5%,” according to Kathy Lien, a director of global research and analysis at GFT.

The greenback has been sinking against several major counterparts, most notably the Japanese yen USDJPY
+0.0875% and the Swiss franc
USDCHF
+0.0355%

Interest rates are also expected to rise by about 50 basis points on short-term rates and double that on the long end, S&P said.

Defying conventional wisdom, Treasury yields have slid in recent days with the 10-year note 10_YEAR
-5.12% yields tumbling to the lowest in more than two weeks on a
lack of alternatives given Treasurys’s traditional role as safe-haven investment vehicle.

Yields on the 10-year securities, which move inversely to prices, fell 11 basis points to 2.84% Friday. Read MarketWatch’s bond report

Sue Chang is a MarketWatch reporter in San Francisco.