After the downgrade

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Article Highlights

  • As of September 30, only 18 countries continue to have a AAA rating

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  • AAA rating statistics don't bode well for the US

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  • History suggests that the economic peril identified by S&P when it downgrades a nation is real

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It is old news that the Standard & Poor's rating agency downgraded the United States' foreign-credit rating from the coveted AAA to the less impressive AA+ on August 5. To date, much of the political discussion has focused on the blame game, with Republicans pointing accusing fingers at the Obama White House's nest of Keynesians. But as Republicans look ahead to the possibility that they might actually defeat Obama, they will inevitably seek ways to recover the exalted AAA status. If history is any guide, repairing the damage done to the U.S. bond rating will be a long, hard slog.

Membership in the AAA club is highly exclusive and carries with it the likelihood that a nation can borrow money at the lowest interest rate available for any nation. Of the 126 sovereign governments that S&P currently rates, only a handful have ever held the highest rating. As of September 30, only 18 countries, or 14 percent, continue to have a AAA rating: Australia, Austria, Canada, Denmark, Finland, France, Hong Kong, Germany, Guernsey, Isle of Man, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland, and the United Kingdom. Ten of these have had a AAA rating throughout their ratings histories.

View a larger size of the graph here

As can be seen in the nearby graph, only eleven countries have lost their membership in the AAA club since 1975. Five of them have never regained the top rating. More interesting for ratings optimists in the U.S. is the right side of the graph, which depicts a likely best case for the U.S. Shockingly, it has taken the remaining nations a minimum of ten years to persuade the rating agency once again to award them the highest possible rating. The average time between expulsion from the AAA club and reentry has been 13 years. The facts not charted are even more depressing. Of the successful comebacks, only Canada and Sweden recovered without additional downgrades in the intervening period.

"Given the very slow progress visible in the U.S. on fiscal reform, many rightly fear that the more realistic best case scenario in the U.S. is closer to the experience of the others. The picture there is ugly."--Kevin Hassett

Given the very slow progress visible in the U.S. on fiscal reform, many rightly fear that the more realistic best case scenario in the U.S. is closer to the experience of the others. The picture there is ugly. Australia was downgraded further to a AA rating only four months after its first downgrade to AA+, and it took 16 years to retake the top spot. The rating of Denmark also fell to AA before beginning its long journey back to AAA: Eighteen years passed before it regained its AAA rating, the longest of any comeback so far. Finland's rating was reduced even lower, to AA-, within a year of its first downgrade. But it managed to turn the situation around "relatively" quickly-it rejoined the AAA club within ten years, the apparent minimum for countries in this situation.

These statistics do not bode well for the U.S. A comparison with countries that, like the U.S., have lost the AAA rating but have not earned it back makes our future look even worse. Ireland, the last country that was downgraded before the U.S., has fallen to BBB+ since March 2009. Venezuela, which held a AAA rating for only five years, selectively defaulted in 2005 and is currently rated B+. New Zealand hasn't regained a AAA rating in more than 28 years. Japan has recently fallen a step lower once again, to AA-, and so does not seem to be close to retaking AAA status.

This history suggests that the economic peril identified by S&P when it downgrades a nation is real. In a White House appearance on August 8, Obama voiced his disagreement: "Markets will rise and fall, but this is the United States of America. No matter what some agency may say, we've always been and always will be a triple-A country." If Obama were right, then the U.S. could look forward to a speedy rating reversal. But a closer look at past downgrades suggests that even if a Republican captures the White House next year, the U.S. is unlikely to regain its AAA rating until after the new president's second term is over.

Kevin A. Hassett is a senior fellow and director of economic policy studies at AEI.

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About the Author


Kevin A.
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.

    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

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