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June 19, 2009

Losing the AAA bond rating

A bond rating service recently sounded an alarm about government bonds from the United Kingdom and implied they may eventually do the same about U.S. government bonds. Why is this important, especially to you and me?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, the AAA bond rating, of course, is the highest for bonds. It's somewhat shocking to hear a service say that they may reevaluate this for governments like the U.S. and the U.K. I think what this is related to is the fact that because of the global recession - the very deep recession - people know that the United States and many other governments - also the United Kingdom - have been spending billions of dollars, almost trillions of dollars, designed to thwart that recession. What this means is those governments have had to go into the bond market and borrow these amounts of money. And I think what this rating service is concerned about, quite frankly, is the ability of those governments in the long run to pay those off. And there's a lot of resistance, obviously, to higher taxes. Government budgets are always tight. So I think this is a wake-up call. Now if, indeed, we did have here in the U.S. that AAA bond rating reduced what this would mean for you and me is that when the government borrows money, they would have to pay a higher interest rate. And so that would mean obviously something would have to give on our part, either we would have to pay higher taxes or there would be less government spending in other areas."

Posted by Dave at June 19, 2009 08:00 AM