August 7, 2011 1:12 pmUS downgradeIgnore the immediate market...

August 7, 2011 1:12 pm
US downgrade

Ignore the immediate market reaction to the first ever downgrade of US credit ? there is bound to be a knee-jerk response.


Investors should remember the underlying US fiscal situation is in no worse shape now than it was last Friday just before Standard & Poor?s announced its AA+ rating. The action is merely a trailing indicator of a situation of which investors in the world?s most analysed economy are already well aware. Indeed, since S&P put the US on downgrade alert in April ? something that would have triggered a sell-off for any other country ? investors in US treasuries have barely batted an eyelid. Yields on 10-year government debt have actually fallen about one-quarter.
Over the medium term, investors are unlikely to rush out of US debt, the dollar, or even US equities en masse. Sure, there are other triple-A rated options, but it is unlikely that significant amounts of money will prefer the UK, France, Germany, or even Finland over the US. As a consequence, US borrowing costs are unlikely to rise materially as a result of the downgrade.

In a global context, investors should keep their minds focused on the here-and-now. Currently, the biggest risk to the world economy is not a US default ? the ability to print its own currency means the worst that can happen is a continued gradual weakening of the dollar over decades. Italy and Spain, however, are hostage to the euro ? a currency they cannot control. The countries? borrowing costs have risen sharply over the past month and the German government refused to contribute more funds to Europe?s bail-out fund.
The two countries need to ask the debt markets for about ?840bn over the next 18 months, far more than Greece, Ireland and Portugal combined. Writedowns could easily threaten the solvency of the many financial institutions. In comparison, the likely immediate effects of the US credit downgrade ? which may just accentuate trends of the past few weeks ? look like a mere sideshow.
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http://www.ft.com/cms/s/3/6cc4efbc-c0e8-11e0-b8c2-00144feabdc0.html#ixzz1ULtk3kQV

Link, courtesy, SpikeyDT - iii,UK