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Q&A | 5 Questions With Economist Editor on the Debt Crisis

Monday, August 08, 2011

Standard & Poor's downgraded the U.S.'s credit rating agency, and economists had mixed reactions. WNYC spoke with Steven Leslie, managing editor of financial services for the Economist Intelligence Unit.

Q. How bad is it that one of the credit rating agencies downgraded the U.S.?

A. Strictly speaking, it's not really that bad. It was a one-notch downgrade by one of the three credit rating agencies. It's not the end of the world. It is a sign of growing dismay about the state of the U.S. economy and its ability to service its government debts.

Q. What happens when a country’s credit rating is downgraded?

A. It's bonds are more risky, so it has to pay more to borrow by issuing bonds. It's more complicated for the U.S. because the dollar is the principle reserve currency in the world. When investors turn away from risk, as they do on a day like [Monday], they tend to buy treasuries. So, ironically, the immediate effect may be to actually make treasuries cheaper for the government to borrow in, but long term, it should make them more expensive.

I think over time, there isn’t much alternative to treasuries, so I think investors are going to have to stay in them. Interest rates overtime should edge up a little bit, meaning we’ll have to pay more on government debt.

Q. Who or what is to blame?

A. The U.S. debt situation is sustainable. It's too high, but it's not a Greece or Ireland or Portugal situation. But, the politics around it were just so venomous, and showed how hard it's going to be to tackle the situation in the medium term. There were pretty good political justifications as well as political ones for the downgrade.

Q. Should we expect other credit rating agencies to follow S & P and downgrade the U.S. as well?

A. It doesn't seem like the recent debt deal really was much of a solution, so [S&P] very well may. They don't want to be in a position where they're assigning very good ratings, including AAA, to other debts that go sour, like sovereign debts. But they're also under attack for their previous mistakes, so they’re a bit vulnerable to criticism as well.

Q. Could we have prevented this downgrade?

A. Yes, because the U.S. debts were sustainable. A more reasonable approach to handling the debt situation probably would have staved off the downgrade. I think that if the Democrats and Republicans could have sat down and put aside some of their ideological impediments and forged a real deal that made sense; the downgrade was not inevitable. Although we were probably near the cusp of it, a reasonable sort of approach on that issue would have fended it off.

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