Not much, in my opinion. In my last post, I argued that I'd take the debt deal even at the expense of the negative publicity we got for the juvenile way the negotiations were conducted. So we avoided default and got downgraded by S&P anyway. S&P's arithmetic mistake aside, I don't think potential investors in U.S. Treasuries relied too much on its previous AAA rating in actively valuing the bonds and bills. And even if they did, they should be only minimally bothered by its current AA+ rating. Potential investors have plenty of public information on current and projected cash flows of the U.S. government. In those circumstances, there is little value added by a ratings agency's grade.
Where ratings agencies can add value is in rating securities that are harder to value. I cannot say it better than E.J. Dionne did:
Rumor has it that the current deficit/debt discussions between the White House and the Republican House leadership may include $1 trillion in defense savings over the next ten years. If this were true, it would be both good news and a manageable savings, since it constitutes roughly 15% of the total resources DOD currently projects for defense over the next ten budgets.
But it is not true. Turns out to be a case of wasting the Congress' time with phoney cuts, abusing budget baselines, and a political fraud on the American people. The trillion dollars, it turns out, is all based on the assumption that we will spend significantly less on the wars or any other combat deployments than the more than $1 trillion we have already invested.
Large foreign holdings of U.S. debt can pose a risk to the U.S. economy, but, so far at least, we have benefited. The "carry trade," borrowing undervalued currencies, mostly the Japanese Yen, and investing it in U.S. debt has been around for a long time. When the dollar is falling, why are Japan and China continuing to hold such large positions? The short answer is we are their largest customer, and they are struggling to hang on to their export business with us.
Japanese holdings of Treasury debt as of the end of February totaled $586.6 billion, down 5.8% from last June. China increased its holdings over the same period from $477.3 billion to $486.9 billion, a 2.0% increase. Considering the dollar has depreciated since then by 9.6% against the Yen and by 8.1% against the Yuan, that's quite a loss the Japanese and Chinese have suffered in the value of those holdings and of the interest income streams they yield.