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What Happens If The U.S. Gets A Sovereign Credit Downgrade?
By EconMatters
After the debt deal is done, I think the biggest suspense of the markets is whether the U.S. will get a downgrade from its current AAA rating by one or more of the three major credit rating agencies. Moody's and Fitch already affirmed Uncle Sam's AAA rating, at least for now. Standard & Poor's (S&P) could be the lone holdout, but some think the major rating agencies would not act in such a 'politically incorrect' way. So what happens if the United States does get a downgrade?
A downgrade would increase the borrowing costs. JP Morgan already estimated a downgrade would cost the U.S. government $100 billion a year. But the buck doesn't stop there, the higher interest rate and payments would trickle down to state, local governments, business and individual as well since most loan interest rates are benchmarked against the U.S. Treasury rate.
A downgrade could also have a negative impact on the dollar driving up consumer inflation, while diminishing consumer purchasing power. Moreover, the U.S. treasury accounts for a significant portion of many portfolios around the world, as it is historically the "safe" investment. A downgrade of the U.S. bond would have a serious wealth reducing effect on a global scale. It would also derail consumer and business confidence. No investment / spending equal no new job creations, which would make the unemployment situation even worse. (See Graphic from McClatchy)
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| Source: McClatchydc.com |
Some economists think a downgrade would not be as traumatic since the U.S. debt/deficit problems and the possibility of a rating downgrade have been well telegraphed, and should have already been expected and priced in by the markets. So when the real downgrade comes, there would not be as much reaction. Another supporting fact--Japan lost its AAA status over a decade ago, but still enjoys relatively low interest rate.
They may have a point. Reuters quoted mutual fund data from Lipper that in the week to July 27; U.S. money market funds -- which primarily invest in Treasuries -- lost $32 billion, while high yield and investment grade bond funds attracted a combined $482 million. So, the markets might already be preparing for the downgrade by shifting some funds away from the U.S. bond.
However, I think the more important question is whether the markets would over-react when the new downgrade hits the news. The debt situations in the PIIGS countries are also well known with all the data out there, but whenever there was a new downgrade from the Big 3 agencies, a market rout still ensued on whichever country in the downgrade news headline.
The S&P 500 has already been down for 7 days straight, the longest losing streak since October 2008, and crashed through the key 200-day moving average levels. The negative technical signs would suggest a potential market rout on any kind of negative news, particularly on one as historical and major as a downgrade of the U.S. sovereign credit rating.
So I think it is premature to say "a downgrade could resound in financial markets more with a whimper than a bang," because there will be consequences to pay as discussed earlier.
As to whether a downgrade will get handed down, politics probably plays a far more important role than whether the fiscal and debt situation of the United States actually warrants a sovereign credit rating.
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Don't you mean ANOTHER debt downgrade? Eagan-Jones and Dagong already HAVE downgraded US debt. Dagong has done it TWICE!
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But both of them get no respect, so it doesn't matter.
The real world has already downgraded US treasuries. Even that stalwart supporter of government antics, the CME, has raised margins on US treasuries due to "market volatility". In the past, if you had treasuries in your portfolio, you could borrow 100% against the value of your holdings to trade but now you can't.
I expect S&P to follow Moody's and do essentially nothing but put it on negative watch, but others not intimately tied to the big Fed con can already see the writing on the wall in the real world.
http://www.reuters.com/article/2011/07/25/markets-futures-bonds-idUSN1E76O0IK20110725
we already have been downgraded--and now you see the response: "a rally in treasuries." talk to the so called "Wisdom Tree"--they came out publicly to sayt they were shorting the two year note. Why are they wrong? I can think of a half dozen reasons actually--but when you have a totally dysfunctional labor market it's hard to imagine treasuries doing anything but rallying while at the same time state and local governments have funding crises. how does one compete against a "debt monetizer" anyways? this is exactly what Japan did.
I hate to be the one to tell you but Dagong Global already pushed reality to the fore and downgraded the US of A from what I've read tonight.
Meh. Dagong and their stupid 'Facts'.
Everyone knows that only the big 3 agencies matter because they alone have the ability to look through such trifling issues as 'Debt load', 'Structural Deficits', 'Roll Risk', 'Collapsing Economic activity' etc. and come to the correct conclusion, which is that the US will always be entitled to a AAA rating. Unless, perhaps, there is a massive uncontrolled default on Treasuries, in which case a downgrade to AA+ may be considered.
Someone needs to raise the question of how short the market Bill Gross (PIMCO) was as of this morning. Talk about more scandal............
Someone needs to raise the question of which US Congressmen were short the market through the period of 7/21 - 08/02. Talk about scandal............
one thing i would say is that interest rates from the gov are still way below natural levels, however interest rates for consumers are very high. you can make the case that mortgage rates are low but the spread of rates vs bank borrowing costs is far greater than before. a rating downgrade causing borrowing costs for consumers to skyrocket is BS by any measure of true economics, however the banks have become used to the extreme spread and wil not reduce rates since they no longer rely on the consumer as a source of funds to borrow from, only a source of revenue to plunder.
if the goal is the wholesale destruction of the american independant consumer, ie those not dependant on the government for income, then a rating downgrade actually helps that cause.
it is collectively over and the constitution has been lit on fire andchain smoked by this congress and joke of a president. the super congress will transfer all power of the legislative branch to obama when the national emergency cause riots in the street. we will get comrade obama and the ussa fater than you can say wha
U.S. has already been downgraded by outside firms.
A U.S. firm downgrading U.S. debt would be like Nazi soldier spitting on Adolf Hitler.
Or a short telephone call........We know where you live!!!!
typcial economists living in a vacuum. Remind me again, wasn't it the same song and dance when Japan was downgraded?
On top of that we have to pay for the vacuum.
Won't...the fix is in
S&P says markets have discounted possible U.S. downgrade | Reuters http://reut.rs/mWz7Ni
If you lined up all the economist that have ever lived back to belly button, you still wouldn't get an answer.
Ready for this, any debt incurred by the Federal Reserve since 2008 and any debt incurred by the 'Super UnConstitutional Congress' is illegal, and the people of the United States are not responsible for it. Let the buyers of that US debt beware, they're going to take a major haircut if they end up holding it. That's how its going to be in the New American Revolution. The entire budget of the Federal Reserve and the Federal Government is UnConstitutional and therefore, illegal. Anyone who buys it is a sucker and is going to take a bath as it will all be rejected. It won't even merit a default because there is nothing to default. It should all be rated Bbb, or less than junk.
Seeing as most of America's pre-2008 debt went to wars, the police state and corporate welfare, let's just default on all the debt. 99% of what it went to is immoral and unconstitutional, along with the currency itself. There is also precedence under the doctrine of "odious debt", i.e. a people should not be responsible for debts run up for purposes of oppression or graft.
We will effectively default on most of it during hyperinflation. At least that way, the people who lose their benefits won't be able to blame the Tea Party, and these people will have much less reason to support the system against total collapse and reset.
A Gallup poll shows that 29 percent thought the economy was in a “depression” and 26 percent said that the original recession never ended.
55% of Americans are smarter than 99% of the economist and 100% of the Fed.
Dood I've got a Chihuahua here that's smarter than 99% of the economists, 100% of the Fed and a pretty good percentage of the American populace.
I love Chihuahuas, but I can't eat a whole one.
Now understqnd the term...Doggy bag......
They're great as leftovers, too!
Most striking stat - wow look at the drop of consumer confidence from 2001 to today
America has become a depressing and exhausting place. People who have hit rock bottom and those hanging on by their fingernails.