Canada, Japan, and Australia, have each lost AAA ratings with few serious ramifications – and have mostly bounced back since. None of these countries have had to pay more to borrow in the long run. For example, Canada’s interest rates briefly went up by half a percentage point after its downgrade in the mid-90s, then came back down to normal levels two months later.
More importantly, the downgrades forced these countries to put better financial policies in place. Through a series of spending cuts, Canada reduced government spending by more than eight percent, thereby regaining its AAA rating in 2002. Washington can learn from Ottawa’s example says David Primo, a political scientist at the University of Rochester.
“Instead of playing the blame game, politicians in Washington should treat this as a wake-up call that real budget reform is necessary, now,” he says.
“I hope that [the US] follows the model of Canada, which certainly took its 1993 debt downgrade seriously, engaging in effective fiscal austerity measures.”
