Downgrade of US Treasury Bonds

Standard & Poor’s (S&P) downgraded the rating of US Treasury Bonds from AAA to AA+ on 5/8/2011 (In India and some other countries 6/8/2011) and that shocked many. It is the first downgrade since 1917. The downgrade followed wrangling in US Congress over raising debt limit, which used to be a routine matter, from 14.3 trillion dollars. Since 1960 USA had raised debt limit 78 times without any problem but this time it was different. S&P stood out from Moody’s and Fitch which continued with AAA rating. Treasury Department criticized S&P. S&P justified its decision and said that if matters did not improve further downgrade to AA was possible.

China criticized USA and called for a new global reserve currency. China has US Treasury Bonds of more than one trillion dollars and foreign exchange reserves of more than three trillion dollars. China had not allowed yuan to appreciate to keep its exports to USA cheap. It has itself to blame. India and many other countries have done like China. For them the unthinkable has happened.

The downgrade should have happened in 2008 when the crash occurred and USA went on giving bailouts of billions of dollars. AIG alone had bailout of 163 billion dollars.

Many people blame Tea Party members in Republican Party for the prolonged negotiations. Tea stands for Taxes Enough Already and those members stood by their commitment to oppose new taxes. Deficit reduction is a problem but there was a solution in 2010 when Bush-era tax exemptions were to expire. Barack Obama wanted tax exemptions to continue for people with annual income upto 250000 dollars and the rich to pay taxes. Republicans did not agree. They wanted the rich to be exempt. So Barack Obama extended the exemptions to all for two years.

Some months back China and Russia had entered into an agreement to use each other’s currencies in mutual trade. Eurozone is in trouble and so euro is not desirable as global reserve currency. Following the example of China and Russia is an option for many countries.

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