Et tu USA?

Although the downgrade of  US’s sovereign debt was expected after last week’s deal in the congress, everyone thought there will be some time for markets to prepare. Also, not very nice from S&P to drop the bomb on us hours after the better than expected NFP (labor market) numbers. But they did it and that’s that.
It is pointless to start debating about the decision. Although I am sure you will here a plethora of arguments for and against. What it is important is to try to make sense of what this means for global economy and of course for Romania.

A very specific answer is close to impossible. But the second best answer is that it cannot be good for anyone. US debt market is the most liquid and at least on paper until yesterday the safest asset in the world. The downgrade does not change the status of the former but it at least raises questions about the latter. I say only raises questions as until a new comparable asset will surface the downgrade cannot alter the global order of things too much. For US at least.
But it will make things (borrowing costs) more expensive for the rest of us.
What I find important is that in the immediate future US will suffer the least from the downgrade. As long as no other good assets will show up the world will move the entire grading curve one notch down. Now the safest asset is AA+ and will just have to move on. Unfortunately for those right at the bottom of investment grade scale it means that they would be pushed into junk territory and so on for the rest of the curve.
My immediate feeling is that US will be affected long term through higher borrowing costs. But the world and especially weak economies will start feeling the bite come Monday Morning.

3 thoughts on “Et tu USA?

  1. I think that borrowing costs will rise if the fiscal deficit is not properly handled in the long term. Job reports will most likely be more important than any deficit analysis in the short and medium term.
    The downgrade will most likely not influence anything. It is also worth mentioning that these rating agencies have not done a good job in the past, grading AAA anything that was capable of producing high profit for more than 1 year (including Lehman assets until it dropped).

    1. I agree about the track record of rating agencies in the past. But in the current situation I have to say the downgrades for PIIGS, USA and even France, Italy are quite obvious. In the case of US you could always make the argument that they can never default as they can print as much USD as they want. However, this comes at a cost of inflation, high interest rates and high taxes. And this makes the whole picture more complicated.
      Totally agree on the borrowing costs. We will have a world with higher cost of living and higher taxes for some time. thanks for reading

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