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EconoMeter: Do S&P downgrades in Europe matter?

Does the downgrade mean much to U.S. economic recovery?


Sunday, January 22, 2012

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Kelly Cunningham, National University System

Answer: YES

Downgrading bonds unquestionably reflects lender loss of confidence in a nation’s ability to repay debt and causes the costs of borrowing and debt to rise. Anxiety over European debt prompted investors to flee the euro, perceiving the dollar as a “safer” haven of investment. The rise in value of the dollar seemed to validate the decision and attracted even more buyers seeking to profit from the appreciation. This creates an illusion of the U.S. economy being in better shape, but the irony is the U.S. has even worse debt and less capacity to repay debt obligations than European nations.