Saturday, August 6, 2011

Say Whaaa????

There is only one news story today.

Standard & Poor’s took the unprecedented step of downgrading the U.S. government’s “AAA” sovereign credit rating Friday in a move that could send shock waves through global markets when they open Sunday night/Monday morning.

The following is a press release from Standard & Poor’s:
  • We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.
  • We have also removed both the short- and long-term ratings from CreditWatch negative.
  • The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.
  • 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, 2011.
  • Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.
  • The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
There are calls to fire US Treasury Secretary Tim Geithner for what is now being called a 'disasterous' turn of events and emergency meetings of the G20 to discuss the financial mess of both Europe and the United States.

But as PIMCO notes:
  • "There will be endless debate on whether S&P, the rating agency, was justified in stripping America of its AAA rating and — adding insult to injury — even attaching a negative outlook to the new AA+ rating. But this historic action has now taken place, and the global system must adjust. There are consequences, uncertainties, and a silver lining."
  • "Not so long ago, it was deemed unthinkable that America could lose its AAA. Indeed, “risk free” and “US Treasuries” were interchangeable terms — so much so that the global financial system was constructed, and has operated on the assumption that America’s AAA was a constant at the core, and not a variable."
  • "Global financial markets will reopen on Monday to a changed reality. There are immediate operational consequences, from re-coding risk and trading systems to evaluating collateral and liquidity management. Key market segments will be closely watched, including the money market complex and the reaction of America’s largest foreign creditors."
  • "Meanwhile, for the real economy, credit costs for virtually all American borrowers will be higher over time than they would have been otherwise."

America occupies the core of the world’s financial system.

This downgrade will have a wider, systemic impact on the rest of the globe starting with a downgrade of France.

China has released a scathing op-ed in Xinhua, the official Chinese news agency.
  • "Dagong Global, a fledgling Chinese rating agency, degraded the U.S. treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators. Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth... China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems."

In the past this blog has told you that Gold and Silver will rise for no other reason than worldwide uncertainty about Sovereign Debt... and that rise would come in a wild roller coaster ride of rising and falling values.

Buckle up gang, the ride has only just begun.

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