Who will pay if the US loses its 'AAA'?
In this issue:
» Consumer prices in India to halve in 2011
» Debt crisis in Europe is far from over
» Panicked investors flock to gold
» World steel demand is set to rise
» ...and more!
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What is more, none of the stimulus measures have done anything significant other than prop up economy recovery for the short term and the government seems quite clueless as to what to do next. So, while it comes as no surprise that the S&P has decided to downgrade America's credit rating, one wonders why it was not done earlier.
Whatever be the case, the possibility of the US losing its AAA rating could result in a wholesale abandonment of dollar assets and would potentially destabilize the entire global economy. For the US specifically, it will put an added pressure in the form of rewards to be meted out for more risks taken by investors from a less credit worthy country. It means that interest rates in the US are bound to go up. This does not bode well for an economy which is still to post a significant recovery. As it is, the US dollar has increasingly come under pressure with many countries questioning its status as the world's reserve currency.
The crisis that US is facing right now is quite similar to what Japan faced in 1998. Then Moody's had revised its outlook on Japan's AAA-rated sovereign debt to negative from stable. Thus, the yen sank to its lowest level in six years and government bond prices fell sharply. Indeed, the US is hard pressed for choice and will have to now focus on bringing its deficit down if it does not want to lose its standing in the global arena. It is very obvious that its stimulus measures have not yielded the desired results and the sooner the government realizes that the better off it may be.
Do you think that a downgrade in the US' credit rating will have an adverse impact on the global economy? Share with us or post your comments on our facebook page.
01:26 | Chart of the day | |
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China, which leads the global steel production, is expected to witness a slowdown in its steel demand from 10% to 5-6%. This is mainly due to austerity measures undertaken by the government to curb the rising inflation. Emerging economies as a whole will see their steel demand going above the pre-crisis levels. India's steel demand is expected to grow by 13.3% this year and 14.3% in 2012. A robust domestic economy, massive infrastructure needs and expansion of industrial capacities will be the main drivers. On the other hand, steel demand in developed economies will lag behind the record levels of 2007-08.
It is important to note that these estimates have not factored the losses caused by natural calamities in Japan, the world's second largest steel producer. There are rough estimates that 7-10 m tonnes of steel capacity have been impacted this year.
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In India specifically, high oil prices are an even bigger cause of concern. The Indian population has not yet seen the effect of high oil prices. This is because a large portion of fuel costs are subsidised by the government. At the current levels of US$ 108 per barrel, state oil firms are projected to lose a tremendous Rs 1.8 trillion on selling fuel below market prices. If prices do not slow down, the government will either have to shell out more rupees or we will soon have to get used to paying a lot more for fuel. It looks like we are stuck between the devil and the deep sea.
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04:56 | Today's investing mantra |
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13 Responses to "Who will pay if the US loses its 'AAA'?"
prabhakar v hegde
Apr 21, 2011For some time yes, however India will stand up indepentely without linking our fate to what happens to U.S. or what happens to any other country. Must we follow and not lead? Alas it is in the thinking!
Sriraman
Apr 20, 2011Your comments on the chart of the day are slightly misleading. Don't you mean that the rate of increase in consumer prices is expected to be half of what it was last year (from c. 15% to c.7%)? To say that "consumer prices in India are expected to almost half in 2011" would imply that their prices are actually expected decline! Is that what you wanted to convey? - Srraman
G.P.Sangal
Apr 20, 2011Downgrade should have happened earlier. U.S. will suffer may not be much as there are hardly any alternatives. It has been the reserve currency since long and has not been under any effective threat so far other than from gold (limited supply).
Nalin Dave
Apr 20, 2011Long Back When I am Student learn that American Economy
is on Base of Purchase Parity Theory or like that world has change lot now economy is generated on Production and Speculation.Deficite is compensate by borrowings or Printing Money.Americans are comensetting it By Selling Tresury Bonds and distribting moey Printed to citizen to keep Pace of Purchasing Production. Ultimately if Surplus is not generated Buyers of Treasury will suffer.
Hence the investor in Speculative Market will sudden Collapse making huge loss to it investors.
G.M.Arora
Apr 19, 2011US rating should have been downgraded in 2008 itself. By not doing so, the rating agencies are favouring US and their working seems to be biased or they are under the influence of US. By downgrading rating, it shall help other economies of word to perform relatively better. India should play the role in this regard as emerging world leader.
Ganesh K
Apr 19, 2011Downgrading of US credit rating was overdue. If it is done then it will have positive impact on the commodity prices in the developing world and make common man's life easy. The Indian stock market index (BSE) will go down and stabilize at its real value of between 14000 to 14500. Be aware gold and silver hoarders you cant eat these metals, neither can you build houses,ships,tanks using gold. The value is only perseption.
Anupam Garg
Apr 19, 2011I second ur views on the IPO situation. If the companies r tht much dependent on investor mood, then it may mean tht thr's something wrong with their fundamentals. It may go to show tht the purpose for which the IPO is being raised is nothing but a fallacy.
Investor mood & sentiment is undoubtedly an aspect but tht's not the only aspect. Companies shld feel lucky tht the Indian mrkt isn't troubled by the recent global happenings. Time is definitely running short & tht 2 quite quickly. Who knows what might b the sentiments tomorrow...it'd b a shame if companies with decent fundamentals enter at wrong time & find tht its already 2 late.
Sultan
Apr 19, 2011Downgrade is done with instruction of Fed only. Fed wants to defraud or negotiate the lender as they can not file chapter 11
Charchil Jain
Apr 19, 2011Don't think this downgraded thing will have any kind of adverse effect on world economy. Reason is very clear that every body know whats going on in US from last few years And their murkier steps to make it large. they don't need any certificate to show their economy is like a "stalk of cards". What happened when the same agency downgraded PIIGS. Having said so there is a lot of difference between PIIGS nation and USA but the situation is same. I strongly feel that It may be end up with a good result for the emerging nations because last recession had taught a lot to the Value investors. And as you mentioned in wrap up that it is only S&P who downgraded, whats wrong with the others and why they did not downgrade it earlier.
Manoj Kumar
Apr 27, 2011No it will not have an adverse impact on the global economy, not at least in the long run. Increase in the cost of money for Americans will in fact be a blessing in disguise and the emerging economies would be able to take a sigh of relief from continuous flow of loose money into them and would help ease the inflation.