US to lose Aaa status?

Moody’s warns today that the US might lose its Aaa status if it does not reduce its deficits, which have blown up since the crisis began at the end of 2007.

“The Aaa rating of the U.S. is not guaranteed,” said Steven Hess, Moody’s lead analyst for the United States said in an interview with Reuters Television. “So if they don’t get the deficit down in the next 3-4 years to a sustainable level, then the rating will be in jeopardy.”

Moody’s has a stable outlook on the U.S. rating, which indicates a change is not expected over the next 18 months.

With a downgrade comes higher investment risks, and with higher risk comes higher returns.  If that’s the case, wouldn’t US investments look more attractive to investors since they’ll be compensated more? Sure a downgrade would be bad, but it wouldn’t be bad enough to actually drive away investors.  Maybe some would shift out of the US but I’m inclined to think more will be drawn towards the US.  That is, if a downgrade in fact does even happen.

Source: Reuters/CNBC

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