The Effects of a Downgrade

Even if we skirt the effects of a default as a result of the current fight over raising the debt ceiling, the United States still faces the possibility of having its credit rating lowered. Standard & Poor's has said that if the deficit cuts don't add up to a total of $4 trillion over ten years, the rating agency might drop our credit rating from its current AAA to an AA level.

That would put the nation's creditworthiness at a lower level than that of countries like Germany, Canada and Great Britain, and would force us to pay more on the amount of debt the Treasury Department issues. Our borrowing costs would go up - meaning that our future deficits would likely get worse before they were able to get better. There would be a ripple effect as well, since local governments often issue bonds linked to the U.S. government. If the feds lose their top rating, the costs of borrowing by other entities would rise, too.

Finally, many consumer lending rates, such as those for mortgages and car loans, would likely increase alongside the rates that Treasury bonds were forced to pay. In other words, even without a default, the debt battles could signal some ugly effects on our economy.