s & p downgrades us debt , page-70

The immediate consequences of S&P?s downgrade:

Interest rates on U.S. debt will increase. Indeed, investors require higher returns in function of the risk, and this rating is an important risk indicator, although not the only one.
The fiscal impact will be major: a 1% increase in interest rates would cost $140 billion dollars.
The confidence of international creditors, and especially central banks, is shaken by an evolution of this type, and will make the financing of the U.S. debt more difficult.
The dollar is expected to be weaker on Forex markets.

There are also many international implications emanating from this decision. First and foremost the announcement comes at a very bad time for America?s strongest allies, the economies of Western Europe. On Friday, the debt risk premium for Italy and Spain increased to one of the largest gaps since the creation of the euro, due to concerns that the two countries could be dragged down by the Euro Zone debt crisis.

In addition, the US?s up and coming global rival, China, is using the announcement to call for the replacement of the dollar with a new global currency (presumably China?s own currency, the Yuan). China seems to be taking this opportunity to shake global confidence in the US economy, while also seeking to deflect ongoing US criticism that the Chinese artificially undervalue their currency to cheapen the price of Chinese exports.

During this climate of significant weakness in both the European and American stock exchanges, we could see a panic reaction this week in the Western markets. After a 10% drop of the Dow Jones in two weeks, the worst might be yet to come. Yet do not mistake current European weakness with the long-term ascendancy of China. In depth economic analyses continue to show that the Chinese economic model is unsustainable and China may be in for some serious crises of its own in the near future.

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