By PAUL WISEMAN - AP Economics Writer | AP – July 6, 2011
WASHINGTON (AP) — The real danger from the downgrade of U.S. government debt by Standard & Poor's isn't higher interest rates. It's the hit to the nation's fragile economic psyche and rattled financial markets.
S&P's decision to strip the U.S. of its sterling AAA credit rating for the first time and move it down one notch, to AA+, deals a blow to the confidence of consumers and businesses at a dangerous time, economists say.
The agency is "striking at the heart of what makes the global economy tick," says Chris Rupkey, chief financial economists for the Bank of Tokyo-Mitsubishi UFJ. "It isn't just dollars and cents."
One economist, Paul Dales of Capital Economics, worried Saturday that the downgrade could even trigger another financial crisis that sends Western economies back into a recession.
The timing could hardly be worse for the U.S. The economy added 117,000 jobs in July, more than expected. But other economic indicators, including manufacturing, consumer spending and overall growth, are getting weaker.
And the markets just came through their most harrowing two weeks since the financial crisis of 2008. The Dow lost about 10 percent of its value on fears of a new recession and Europe's spiraling financial problems.
In normal times, in another country, a downgrade in a country's sovereign debt rating probably would force its government to pay higher interest rates to convince investors to keep buying its debt.
If that happened, it would drive up the rates that consumers pay on mortgages and auto loans, which are often tied to the government's interest rate.
