Why did the S&P (Standard & Poors ) downgrade US Rating from AAA to AA+ and what will happen from here?
You can read the actual US downgrade here -was done by Nikola G Swann from the Toronto Office http://sg22.ly/p8ZJPm
More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011Our revised downside scenario--which, other things being equal, we view as being consistent with a possible further downgrade to a 'AA' long-term rating--features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries. We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening. Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021.
It was argued by the US Treasury Department that there was a $2 Trillion error that was missed in the analysis.
Even if that is the case, the underlying problems still exist – Let’s just hope the S&P company never needs a bail out since I’m sure they are not in the Governments good books right now.
So what will happen from here ? & as Traders what should we look for
What does the S&P – U.S. Downgrade do?
1) Sends a clear wake up call to Washington
2) We could expect higher interest rates
3) Some are predicting Armageddon
4) Some are saying its no big deal
Who will this US downgrade affect ?
Individuals , Business, & Government ( so basically everyone) check graph below of who holds that US $14+Trillion Debt and what percentage. Anyone on that list will be affected in one way or another. ( I’ll try to have a future blog where we can break it down in more detail)
Here’s a few examples of how this US Downgrade will affect that list
1)Interest Rates move up which causes borrowing costs to move up and that will affect anyone with a line of credit, loan or mortgage (both businesses & individuals) .
2) Stock Prices should move down — Some experts say Dow could drop another 1,100 points from here — Note: Canada lost its AAA rating in the 1990’s but stocks moved up 15% the following year of the downgrade)
3) Since has never happened to a superpower like the US to lose the AAA rating what will actually happen will initially be based on the fear and uncertainty
4) German Bonds could go up as investors look for safer balance sheets
5) China won’t be happy -read a story this morning that said “China Tells US ‘good old days’ of borrowing are over”
6) Banks –
many other things will be affected & we’ll see this being debated and discussed in Washington & in the news —
We’ll see Sunday Night what futures will do but should be a very interesting week ahead …. Tune in
I will be running live Futures charts Sunday night so check http://twitter.com/stockguy22 or this blog for the link to access the live feed