25th July 2011
He says: "It is likely that the nation's leadership will stumble into a short-term compromise over the next few days — one that raises the debt ceiling and avoids a debt default but, importantly, leaves the AAA rating extremely vulnerable and does little to lift the damaging clouds hanging over the US economy.
"It will come down to the wire; and when the stopgap compromise is reached, many in Washington will declare victory and, in the process, claim credit for averting a national disaster. Yet the resolution will likely be temporary, and the damage will be real and long-lasting — both of which render an already worrisome situation even more difficult going forward. Indeed, by illustrating so vividly to the whole world what is ailing America, the weekend's political theatrics should make us all worry even more about the world's largest economy."
Damning words indeed.
The Guardian also covers the story here and amid the political point scoring there is a debate about the wisdom of investing in US Treasuries.
dorlomin queries whether pension funds will be able to hold treasuries in the event of a downgrade.
"As I understand it many pension funds and banks are legally bound to only hold AAA debt for certain uses, if US treasuries lose this status it could create a bit of pandemonium round the word as people try to dump T bills and find something else worth holding in sufficient volumes. Good day to be long on gilts if it does happen?"
Scaff1 suggests the problem actually might rest with the people – in this case the American people.
"Although raising the current debt ceiling is of immediate concern, it doesn't address the problem that distinguishes this particular discussion: the "people" as a whole are unable or unwilling to agree on how to service the debt. Regardless of whether or not the debt ceiling is raised this time, in the medium term the US is far more likely to default (or force loss through inflation) than their AAA rating would suggest. The problem of being capable of servicing the debt does need addressing, but of primary concern is the ability to organise. With little changing over the coming months, politically, even a raised ceiling now will give little confidence to investors that this won't happen again in a few months time. Would you invest in US bonds? I'm far less certain than AAA, personally."
Gray62 agrees and suggests avoiding treasuries though he reserves some of his ire for the ratings agencies.
"No reasonable, responsible acting investor would buy US treasuries now, when the threat of those papers losing much of their value is very real. The rating agencies aren't doing their job, they're playing politics. They know damn well that downrating the US would trigger very damaging consequences, and they want to avoid that any way they can. At the same time, they don't feel any responsibility for any foreign nation, and happily do the spin for hedge funds gambling against the GIPSI's. More than enough reason for the EU to stop the dirty business of Moody's & Co. When ratings aren't based on rational judgment, they don't have any economic value at all."
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