Sunday, August 7, 2011

US downgraded by S&P, What it means to you?

The credit rating agency S&P on Friday lowered the nation's AAA rating for the first time since granting it in 1917. The move came less than a week after a gridlocked Congress finally agreed to spending cuts that would reduce the debt by more than $2 trillion. The promised cuts were not enough to satisfy S&P.

The biggest questions after the downgrade was what impact it would have on already nervous investors. While the downgrade was not a surprise, some selling is expected when stock trading resumes Monday morning across all markets. Following are the possible impacts of S&P down grade.



Dollar: There's a reason people worldwide buy the dollar and store their savings in U.S. dollars. It's widely been considered the safest option, a stable currency in any event. That would change. People wouldn't be as keen to buy the U.S. dollar, and already they are turning to Australia, Germany, Austria and other countries for haven investing. The dollar could lose its status as the world's reserve currency. 

Interest rates: The previous top-notch AAA credit rating meant the U.S. pays lower interest on its $14.4 trillion in debt. With a downgrade, the country would likely pay a higher interest rates on its debt.
That would also hold true for consumers, as interest rates on consumer loans generally pace government debt (often the 10-year Treasury). Home mortgages, car loans, bank loans and other debt would likely carry higher rates. This would affect the spending power of American citizens and in turn affects Indians too.

Stock market impact: More observers are starting to think there wouldn't be much market response to a downgrade. But one must be cautious at the start of next week.

Political impact: No politician wants to see a credit downgrade on his or her watch. It would be a source of embarrassment for President Barack Obama and members of Congress. And a downgrade would add more pressure on lawmakers to cut the deficit.

So in conclusion , investors must be cautious early next week to see how the markets are handling the issue. Many experts feel that this negative news is already factored in the prices. But no one is sure about it.  Lets keep our fingers crossed and wait for more news flow.

Do share your thoughts on the downgrade.

Regards,
Jerith Shajan.