S&P ANNOUNCEMENT:RATINGS AGENCY Standard & Poor's will today announce the result of its ratings review on entities linked to the US government, such as housing finance agencies Fannie Mae and Freddie Mac.
A downgrade is considered likely because S&P has emphasised the entities’ link with the sovereign rating in the past.
“The odds are very high that there would be knock-on consequences of other borrowers getting downgraded – both corporate and public, in the US and overseas,” said Peter Fisher, head of fixed income at BlackRock, in a note to investors.
“What really ends up happening is a downward shift of the entire spectrum of fixed-income securities,” he said. Broader downgrades “would be a signal to all types of investors to re-examine their risk appetite”.
S&P managing director John Chambers said yesterday that there was a one in three chance of a further US credit rating downgrade over the next six months to two years. "We have a negative outlook . . . from six months to 24 months," he said on ABC's This Week. "And if the fiscal position of the United States deteriorates further or if the political gridlock becomes more entrenched, then that could lead to a downgrade."
Mr Chambers said it would take some time for the US to recover its AAA rating. “It would take a stabilisation of the debt as a share of the economy and eventual decline. And it would take, I think, more ability to reach consensus in Washington than what we’re observing now,” he said.
The US Chamber of Commerce, a powerful business lobby group, said that while it disagreed with the decision to downgrade the US credit rating, it hoped the move would spur Washington to act.
“While we don’t agree with SP’s decision to downgrade . . . its action should be another powerful incentive for lawmakers to do the hard work necessary to get our fiscal house in order,” group president Thomas Donohue said.
Billionaire investor Warren Buffett has also criticised SP’s decision, arguing that the US warranted a “quadruple A” rating.Any sell-off in treasuries and the dollar following the downgrade is likely to be short-lived amid slowing growth and Europe’s debt crisis, according to Wall Street banks.
JPMorgan Chase said a drop in treasuries from the ratings cut is unlikely to be “sustained” while Citigroup said dollar selling isn’t forecast to be entrenched. Barclays said the downgrade shouldn’t be “significant” and UBS said the top ranking for US short-term debt will prevent money funds from being forced to react.
“This downgrade is not that important . . . The US is in a much better position than any, I repeat, any European country,” said John Taylor, chairman and chief executive of FX Concepts, the world’s largest currency hedge fund. –(Copyright The Financial Times Limited 2011/Bloomberg/ Reuters)
