Banking on a Triple-A rating (Part 2)

By George Chen
August 8, 2011

By George Chen
The opinions expressed are the author’s own.

Who is perhaps the most hated man in Washington as well as on Wall Street these days?

Your guess? Not Muammar Gaddafi, not some Al-Qaeda extremist, not Kim Jong-il, but a man named David Beers. You may never have heard of David Beers but every financial policymaker in the world knows his name.

A Wall Street veteran and a graduate of the London School of Economics where he has endowed a scholarship in his name, he is the global head of sovereign credit ratings for Standard & Poor’s. For a Reuters story in details, click here.

To the surprise of some investors, if not everybody, the United States lost its top-tier credit rating from Standard & Poor’s, just days after rival agency Moody’s decided to extend its Triple-A rating for the United States. The chain reaction from S&P’s downgrade is obvious.

From London to Hong Kong, this is really the only story that investors care about and are talking  about. How will the Hong Kong and Shanghai stock markets open on Monday? How much will the market lose further this week?

These questions themselves are scary enough, aren’t they? Some economists and central bankers have tried to ease investor worries in the past 48 hours. They caution against overreaction because S&P is so far the only leading global rating agency to downgrade the U.S. We still have Moody’s and Fitch.

If Fitch also retains a triple-A rating for the United States, technically the U.S. government probably won’t be too worried about the outlook for its currency and dollar assets. S&P’s downgrade must be appreciated and welcomed by a small but ambitious player in the ratings industry.

Beijing-based  Dagong also downgraded the United States, although the impact was of course extremely limited and some investors have already dismissed Dagong’s downgrade as a political rather than financial decision. Read my last column ”Banking on a Triple-A rating (Part 1)” on to see more drama behind the scene in the world of ratings.

I won’t elaborate on the potential impact on global markets of the S&P downgrade. Your mailbox should be full of research notes about this from your brokers and investment bankers. See how much email you receive today about the downgrade.

Probably, the more emails, the more serious and bigger the impact will be.

Central bankers certainly don’t want to see another financial crisis but they are no smarter than most of us. Now we have a game of market sentiment rather than a debate among central bankers and economists. The market will naturally express what it thinks and then we will see how it goes.

For better or for worse, S&P this time has made a difference as it apparently wins the public relations game among the big three ratings agencies. This may even be a motive for the decision to downgrade the United States … I hope not.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: David Beers, Managing Director of Standard & Poor’s sovereign and international public finance ratings group listens to reporters during a Reuters Investment Outlook Summit in London, June 9, 2010 REUTERS/Benjamin Beavan

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