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What CEOs Need to Know About the S&P Downgrade

The markets have been in turmoil since the S&P downgrade of US debt at the end of last week and downgrades of municipal bonds on Monday. The market tumbled on Monday, rallied on Tuesday, and then dropped significantly again on Wednesday. Amidst this turmoil it’s difficult to tell what the end result will be (and it seems like everybody has an opinion). Here is information about the downgrade’s effect on small businesses (you can expect your cost of capital to increase) and cities (borrowing costs will rise).

Reactions have been across the board to the S&P’s downgrade of U.S. debt, and there has been increased uncertainty as the S&P also downgraded some municipal bonds on Monday. There will be changes, but it seems that reality may be better than some overkill predictions.

JP Morgan’s Jamie Dimon stayed positive and said to a California television channel, “The strength of the system is going to blow your socks off when it comes out of this malaise.  I don’t know when, three months, six months, nine months or a year, but it will pass,” according to a Bloomberg article.

But, for now, the volatile economy will have an affect across the board.  If you’re a small company, Business Insider says that you will be affected in two ways:

  1. The US government’s leverage to pump the economy has gone down even further – expect decreased Federal spending; expect tax increases (both business and personal); expect innovation to slow; expect stagnant job growth
  2. Interest rates will go up in near future as the cost of borrowing money in the US will rise – expect higher interest rates to increase your cost of capital; expect the cost of imports to rise as the value of the dollar falls; expect to become more competitive with a weaker dollar and lower costs (this is good for small businesses)

The downgrade may also produce less-immediate changes to urban infrastructure in U.S. cities, according to Forbes; the downgrade prompted speculation of a future downgrade for thousands of municipalities.  Forbes expects that this speculation is exaggerated, but does hold some truth.  Most likely there will only be downgrades to cities that are believed to have some Federal exposure.

The change that will be seen in urban infrastructure will come in the form of lower property values (because of higher interest rates) and less available local housing financing. Lower property values affect a city’s financing abilities as well. Cities may have to turn to private sources to fund public projects.

Read: The Impact Of The S&P US Credit Downgrade On Small Businesses
Read: Dow Drops 520 Amid New Europe Debt Concern
Read: S&P Drags Cities Into the Brave New World
Read: S&P downgrades credit ratings for Fannie, Freddie, municipal bonds linked to U.S. government

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