It does not appear to be as frightening as I might have assumed. Here is a bit (via Business Insider) from a Goldman Sachs conference call this morning where the impact of a AAA downgrade is discussed
11:23 It has to do with the magnitude of the downgrade. If we went to AA, directionally it would be negative but it’s suprising the modest effect it could have on, IE:
– Money market mutual funds are front of mind when thinking about a downgrade. Reqired to hold 97% of their assets in AAA
In terms of the rating that matters – it’s the short-term rating, not the long-term rating. And the S&P has implied that it would only downgrade the long-term, so money market funds wouldn’t be affected. They hold between 300 and 350 billion in treasuries. Probably not as much of a risk
– Financial sector- banks — didn’t want to be too specific, but under Basel I there wouldn’t be any affect. under basel II, 0-risk to anything AA and above, so not really an issue
The complicated factor comes in with some of the larger firms, there could be a slight uptick in the calculated capital required to be set aside related to holdings. But a very minor change in capital requirements
– Insurers – obvious. those three bring the $ up to $1 trillion
– Pension funds – not much of an issue
11:28 Rest of the question becomes what the rest of the world would do, how much selling, but they might have more flexibility than holders in the U.S.
11:31: On august 3rd we have a social security checks due. On August 15, we have a coupon due. The treasury will have to decide what it will do to make those payments
Perhaps the bigger impact will be political if Obama or Republicans get the bulk of the blame for losing America’s gold-plated credit rating.