U.S. Credit Rating Downgraded
 
  

 

SHARETIPSINFO >>Research Reports >>S&P downgrades US debt rating (Added on 08 Aug,2011)

 

S&P Downgrades US Debt:
“When sorrows come, they come not single spies But in battalions.” It was first the debt crisis in Europe and then debt limit concern of US, now S&P downgrading the rating of US debt by one notch to AA+ from AAA+. This is for the first time in the history that US debt is downgraded.

The announcement comes at a very bad time for America’s strongest allies, the economies of Western Europe. On Friday, the debt risk premium for Italy and Spain increased to one of the largest gaps since the creation of the euro, due to concerns that the two countries could be dragged down by the Euro
Zone debt crisis.

China, is using the announcement to call for the replacement of the dollar with a new global currency China seems to be taking this opportunity to shake global confidence in the US economy, while also seeking to deflect ongoing US criticism that the Chinese artificially undervalue their currency to cheapen the price of Chinese exports.

During this climate of significant weakness in both the European and American stock exchanges, we could see a panic reaction this week in the Western markets. After a 10% drop of the Dow Jones in two weeks, the worst might be yet to come.

Near term Implications:
Cost of borrowing could increase for the US govt. 1% increase in cost of borrowing means $140 billions of extra outgo.

US Economy to slow down as cost of borrowing rises.
Sell off in dollar expected. Dollar could see panic selling and depreciate. But in medium terms it will appreciate against major currency as slowing economy will bring down the prices of all asset class.

Major asset classes traded globally is measured in terms of dollar. So decline in their prices means appreciation in dollar.

The confidence of international creditors, and especially central banks, is shaken by an evolution of this type, and will make the financing of the U.S. debt more difficult. With rise in borrowing cost price of US long term debt will fall. So value of investment in US bonds will also get eroded.

Worst Hit Economies:
China being the largest holder of US bond and have export oriented economy will be hit badly by this downgrade.
Japan second largest holder of US bond and also have export oriented economy will be the other countries to get hit. Also depreciating dollar will hit Japans export competitiveness.
Indian exporters will get hit.

Impact on Indian Economy:
Indian economy on more often has showed resilience to the global economic turmoil. Structure of Indian economy more towards the domestic consumption rather than export oriented.
The downgrading of US sovereign rating will negatively impact exports and moderate capital flows into the country.
Slow growth of the US and Europe will have some adverse affect on Indian exports, particularly on export of services.

Sectors to Get Hit:
IT
Textile
Shipping
Metals
Mining

Sector to outperform the Market:
Telecom
FMCG
OMCs

 

 

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