Wednesday, 10 August 2011

US downgrade creates no great ripples

A Moody's spokesperson said that the rating agency would continue its AAA rating on US debt based on the August 2 debt deal approval. Its premise for affirming the AAA rating, the analyst said in an interview to CNBC-TV18, was that the agency believes US debt deficit was challenging but not impossible to meet.
He, however, added that the US may see a downgrade before 2013 if its fiscal discipline weakens or the economy deteriorates further.
Standard & Poor's, one of the three major credit rating agencies, said there was a heightened degree of risk in holding debt issued by the United States. So it lowered its rating from the AAA, the highest possible level, by one notch to AA+. It also said the outlook is negative.  The other ratings agencies, Moody's and Fitch, currently still have a AAA rating on US debt.
S&P believes the outstanding debt of $14.3 trillion and projected deficits in the coming years in the United States no longer warrant the top-tier rating that it had assigned to the United States since 1941. It also said that the political environment does not build confidence that the United States can agree on how to lower the deficit in a meaningful way any time soon.
This once again brings to light the debate on whether ratings by agencies are to be believed at all.
Indian and Asian markets initially witnessed a kneejerk reaction to the news of the downgrade but quickly recovered. So, what exactly is the impact of one of the agencies downgrading US debt?
Does this mean the US debt is no longer safe?
No. At AA+, the US is still considered to have a "strong" ability to meet its obligations.
What impact does the downgrade have and what will it cost?
Over time, a lower rating will cause investors who buy US government debt to demand a higher interest rate to hold that debt to reward them for the risk. But with only one agency downgrade the impact remains a question.

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