The historic US downgrade: questions and answers

Some of the immediate impacts of Standard & Poor's historic downgrade of the US credit rating are becoming known. But looking further ahead, many questions remain.

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by Chris Marshall on Aug 09, 2011 at 15:36

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…but we don’t know if a return to recession is looming

Predictions vary, but some reputable economists say the chances the US returning to recession are as high as 50/50. Markets were already tumbling last week as the fear of a return took precedent over the deal on the US debt ceiling. And ‘market expectations probably still have further to adjust down to reflect a weak growth outlook,’ according to Philip Poole, global head of macro and investment strategy at HSBC.

There remains no real alternative to US treasuries…

Even as the US credit rating was downgraded, investors fled to their safe haven of choice… US treasuries: ‘too big to sell’ as UBS strategists have described them as the flight to safety seems to have taken precedence over the ratings agency’s view.

With their unrivalled liquidity and US government backing, treasuries clearly remain a sanctuary. Investors simply have no where else to run. And the majority of those institutions owning treasuries will not be ‘forced sellers’ after the downgrade to AA+.

Nor is there yet an alternative to the dollar as the world’s global currency. The euro is undergoing what may turn out to be an ‘existential crisis’ as Bill Miller of Legg Mason puts it, while China’s renminbi is not ready yet.

...but the dollar’s role as an international reserve currency is being eroded

The US dollar still constitutes by far the dominant share of reserves and it will take a long time for this to change. But the world is changing; as Jim Leaviss, head of fixed interest, said this is an ‘end of empire moment’ .

A report from forecasting company Exclusive Analysis predicts that ‘rather than a panic fire-sale there will therefore probably be a marginal adjustment out of the US dollar over time, with its share of new assets falling gradually in favour of a much more diversified basket.'

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5 comments so far. Why not have your say?

Amazing....these are the guys who completely failed to see/understand the Banking crisis and the property bubble ......Junk bonds etc before that. Moody's in the same boat.

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The writing has been on the wall for many years.

There have been many commentators remarking on this fact, but the politicians, to appease those don't vote for them had ignored prudent decisions and stuck by their dogmas.

In this respect I will give credit to Obama, definitely a smooth talker, and the greater part of the blame lies with the Republicans, for their blind intransigence in respect of the crisis that face them. Alone Are Not Sufficient. There Has To Be a Two-Pronged approach, something they appear to be incapable of understanding.

It is easy to blame the Obama administration for dealing with a problem that has long been outstanding, care for those that have done their bit for the nation and now need to benefit from the results of their labours.

If America wants to remain at the forefront, they should lead the way by addressing their excesses which have resulted in the current debt mountain.

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These guys didn't fail to see the banking crisis. They switched off their radar so they couldn't see it. Around 2003, they adjusted their sub-prime mortgage calculations that were showing signs of stress at the behest of banks, because each CDO mortgage fund containing around 2,000 sub-prime mortgages and given a triple A rating could earn the Credit Rating Agency about $200,000 for a few hours work.

But if you were to give the fund anything less than Triple A, then the bank would stop sending the work to you and go to one of your 2 competitors. Changing the mortgage formula to suit the rating and avoid red flags became the norm.

As for conflict of interest, well, it looks more like that was designed in from the outset rather than any failing of principles or procedures.

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It is probably not far from fraud. It has already been noticed that investment banks colluded with hedgefunds and rating agencies in the MBS market. It just beggar belief why a criminal case has yet to be launched. If the regulators do wish to get to grips with this then the case which has been filed against BoAML by AIG for $10bn deserves to succeed and hopefully others will follow and take on the likes of Goldman Sachs.

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mo khan

Aug 14, 2011 at 16:25

Has Standard & Poor’s downgraded it self too?

How can we tell!

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