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On This Day - 19 APRIL 2011
Who will pay if the US loses its 'AAA'?
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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.
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.
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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