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U.S. Debt Downgrade?

August 5, 2011

Six days before the deadline to raise the national debt limit, 30 of 53 economists surveyed by Reuters news service believed the United States will lose its AAA debt rating in the near future.  Some would argue that kind of action is overdue with the national debt standing at about $14.5 trillion and growing.  However, many experts contend that the financial markets have already built in the possibility of a debt downgrade.  As such, any material impact on the interest rate environment would likely be muted in the near term but the long-term effect would be to put upward pressure on interest rates.

There are conflicting signals out there on rates, though.  The continued weak economy is likely to keep downward pressure on rates, at least for the near term.  The Fed has said as much in recent weeks.  This remains a very challenging environment for financial institutions.  Successful credit unions are continuing to update and create long-term financial forecasts and develop contingency plans.  What if loan demand remains weak?  What if rates rise; remain low?  Keying in on the performance of new business is a critical component in this as well.  In addition, credit unions should continue to evaluate their levels of interest rate risk and make determinations as to whether those levels are acceptable.  Now, more than ever, effective planning and risk management will be critical to credit union success in the coming years.

Source:  Reuters

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