Sunday, June 12, 2011

Another angle to consider...

As we hurtle toward default: the role of ratings agencies like Moody, Fitch, et al.
The short run picture is more complicated. Avoiding default is presumably the main concern, but if that could be achieved by a Dem capitulation to demands for large spending cuts, so much the better. On the other hand, maintaining any kind of credibility requires a downgrade well before default actually takes place, and probably a series of downgrades as the deadline approaches. Even a single downgrade would throw financial markets into disarray (among other things, investors who are required to hold AAA assets would have to dump Treasuries and, presumably, buy the bonds of other governments). That in turn would place huge pressure on the Republicans. While the idea of “not raising the debt ceiling” polls pretty well, the reality of “destroying the US credit rating” probably won’t. [More]
This is the wrinkle that makes blither about "technical default" so misleading, methinks. The debt market is poorly understood and badly predicted in relatively placid times. Debauching the benchmark debt instrument could provoke little or horrifically concatenated reactions, as outlined above. It seems foolish to find out which for very little gain.

We forget that too many internal investment rules, or mandatory legal guidelines use US Treasuries as THE standard of prudence. Moreover, the knock-on effect would ripple through all other "safe" investments which are actually backed by US bonds.

Where will nervous money go?

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