The impact of U.S. credit rating downgrade

July 20, 2011

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.

 

3 comments

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I wish my credit rating would go up the more I borrow and down if I stop borrowing.

Posted by M.C.McBride | Report as abusive

It would be tragic that the United States credit downgrade at first would show minor effects the bench mark would be set.bwnhen as the economy starts to stagnate around September or October deflation becomes a risk or the need for another money drop. The fear most american have right now is the fear of an insecure government and a less than confident administration saddle with an under educated freshman congress. IF the statement is true about Norquist redefining his position on old new tax interpretation he should be burned at the proverbial stake after holding young politicians careers to the fire. The EU/ECB and IMF need to close the deal with GrG

Posted by mward1921 | Report as abusive

McBride, your credit works in a similar manner. When you have credit obligations and are paying them, your credit will strengthen. When you stop paying them your credit weakens. Whether you choose to borrow more or not does not impact your credit rating. However, your credit rating will determine how much you are able to borrow. Please make a better effort to understand the current political and economic climates.

Posted by smarcus | Report as abusive

[...] Debate continues about what effects a credit downgrade could have. Some Wall Street traders say discussion about the potentially devastating effects is “much ado about nothing,” and Reuters’ James Pethokoukis says the impact would not be “as frightening as I might have assumed.” [...]

[...] of the possible consequences (more)? U.S. Treasury securities, once undisputedly the safest investment in the world, are now rated [...]

[...] The impact of U.S. credit rating downgrade James Pethokoukis – Reuters.com 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. [...]