US debt crisis: how it could affect people in the UK
Tuesday November 8, 2011
The debt crisis has had a big impact across the globe. From Greece’s ongoing economic troubles to the news here in the UK that 12 financial firms would see their credit ratings downgraded, it often looks like nowhere has been left untouched by the financial crisis.
And it isn’t just Europe that is struggling with high-profile debt problems. The United States has also found itself facing uncertain times in recent months. In August, Standard & Poor’s rating agency downgraded the US’ top-rank AAA credit rating to AA+. This was particularly troubling given that the US was first given the top credit rating back in 1917.
Credit rating agencies – including S&P, Moody’s and Fitch – analyse a country’s ‘risk’ and give a debt rating designed to reflect how confident they are that the country can repay its loans.
The United States’ credit downgrade could complicate things even further for the country – giving a ‘negative outlook’ for its financial future – but the effects of its debt crisis may not just have a damaging effect on the US’ economy. Indeed, the impact of America’s national debt crisis could also be felt across the Atlantic in the United Kingdom – and have negative effects on ordinary people here.
What exactly is going on?
The United States actually has a limit on the amount of money it can borrow. That cap on debt, or ‘ceiling’, is the total amount that the US government is allowed to borrow to meet its financial commitments – from welfare to interest on national debt.
However, on 16th May this year, the ceiling was hit, and as a result, the US Treasury was forced to adopt some “extraordinary measures”. Despite this, the US government voiced concerns that it would run out of cash by August 2011 – raising the prospect of the US defaulting on its commitments to its $14.3 trillion (equivalent to £8.7 trillion) national debt if a new limit wasn’t agreed.
The US Department of the Treasury said: “Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history.”
On 1st August 2011, US President Barack Obama announced that he’d struck a deal with Republican and Democratic Congress leaders to end the country’s debt deadlock by raising the debt ceiling and cutting federal spending. However, that doesn’t mean everyone’s convinced that the country won’t default on its debts in the years ahead.
How could this affect the UK?
But how does this affect the UK? The United States is a very important trade partner for the UK – the UK’s largest export partner in fact – so a default would really affect us. And if it led to another recession across the planet, this would obviously have an impact on countries everywhere – including the UK.
Headline stories like this one might sound like they’re just something for politicians to worry about, but they can end up impacting on the real lives of everyday people. Of course, there’s nothing that normal people can do about the US’ debt problems, but it pays to be prepared for any more unwelcome financial news – by managing your finances carefully and trying to reduce your own debts. Note: We recommend the Debt Advisory Centre for our UK visitors.