Credit Downgrade Likely To Boost Borrowing Costs

The decision by ratings agency Standard & Poor’s to downgrade the U.S. credit rating is already causing financial market gyrations (US markets were down 2.5 percent to almost 4 percent in early afternoon trading), but the impact could be balanced by the decision by another agency, Moody’s, to confirm the nation’s AAA status.

The news was not really a surprise, which could help cushion the impact. The fact remains, however, the S&P ratings adjustment of the U.S. rating to AA+ could ultimately result in higher borrowing costs in the form of higher mortgage rates (for one thing).

For small businesses, that means that the consumer spending paralysis that has thwarted a meaningful economic recovery will continue for the foreseeable future.

In issuing its decision, S&P noted it was “pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.” It also left on the table the possibility of a further downgrade in the future.

In an effort to minimize the damage, the U.S. Treasury Secretary Timothy Geithner criticized the S&P move in an interview on Aug. 7. In public comments, Geithner said U.S. Treasury securities remained a “safe” investment that will continue to attractive to China and other major borrowers. He noted: “[S&P has] handled themselves very poorly. And they’ve shown a stunning lack of knowledge about the basic U.S. fiscal budget math.”

If there is anything good that might come of the S&P judgment, it is the possibility that the Congressional “supercommittee” that will be appointed to define the plan to trim at least $1.5 trillion from the nation’s spending may be inspired to move faster. What’s more, it will likely lead to an entirely different approach to government spending. At least, that’s one possible, desirable outcome.

As Senator John Kerry (D.-Mass.) told the NBC “Meet the Press” program on Aug. 7: “This poses a set of choices not just about a recession. It’s about a financial crisis and the structure of our economy, which has really has been misallocating capital.”

One thing is for certain: the U.S. public knows way more about the U.S. debt than it did just two months ago. That is likely to color their spending habits for many months to come.

Heather Clancy is an award-winning business journalist with a passion for small businesses, green technology and corporate sustainability issues. Her articles have appeared in Entrepreneur, Fortune Small Business, The International Herald Tribune and The New York Times. Follow her on Twitter.