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Any cut in US ratings to weaken USD

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The demand for gold, silver and commodities would persist due to economic/political difficulties in the United States. Despite a possible downgrade of US debt by rating agencies - in case of non-agreement between the two political parties in Washington DC - world s central banks will have very little option but to continue to buy US Treasuries.

Pumping of cash dollars accompanied by FED s loose monetary policy stance have helped in halting the economic slide of world s largest economy. It may have also helped in reducing the borrowing cost and increased corporate profit. The chances of growth, however, are not visible as the job situation remains quite disturbing as unemployment rate is still too high.

The US financial market is heading for a very difficult period due to its friendly quantitative easing approach. The US economy is paying the cost of its 2009 USD 787 billion stimulus package and is struggling with a large deficit. It continues to print notes.

America s legal debt limit of USD 14. 3 trillion that expired in May this year is 97 percent of its debt-to-GDP ratio against the size of its USD 14. 7 trillion economy. It is struggling to survive in a given extended period of time by desperately employing emergency measures to avoid default, as talks between the Obama administration and Republicans failed last week due to rejection of USD 3 trillion deficit plan by Senate.

The real cause of worry in the financial sector is that the deadline to raise the debt ceiling is August 02. What is going to happen if the US loses its Triple-A ratings? S&P has already cut US outlook to negative. Last week, S&P forecast that there are 50-50 chances of a cut in US Triple-A credit ratings in the next 3 months. So, one thing is for sure that if it happens then the US could suffer another round of financial crisis.

US Treasury Secretary Tim Geithner was asked this question several times. But he said no on each occasion. In a similar situation, whenever the Irish and the Greece Prime Ministers were asked whether they were going to ask for a bailout package, they always responded by saying that they were not going to seek funding help, although they were ultimately left with no choice but to ask for emergency loans.

The US economy came across a similar situation in 1995-96, as budget issues led to temporary government shutdown resulting in lowering of outlook of its sovereign debt ratings. There is a significant difference between a negative outlook and a downgrade. A negative outlook suggests that there is a potential threat of lowering of sovereign debt ratings in the future, which can take six months to 24 months.

Furthermore, in 1998, when the outlook for Japan s Triple-A rated sovereign debt was pushed down to negative , the yen sank. The world economy cannot afford S&P or other rating agencies adventurism at this point in time in order to avoid a collapse of greenback. In my view, the US debt rating should not be downgraded, as it is still below 100 percent of the country s GDP. The US should seriously work towards bringing down the deficit. USD still enjoys the status of reserve currency and over 62 percent of investments are in the USD. The US housing market is still very fragile, so any bad news of a downgrade would be a disaster for the world economies in general and the US economy in particular.

However, downgrading of US debt rating could see a fall to AA+ from AAA , resulting in pressure on the US dollar with a possible temporary shift of funds from the reserve currency portfolio and capital inflow. A fall in ratings may put an upward pressure on US bond yields. It may also led to a rush for gold and silver and a further surge in food prices.

A delay in progress in debt deal is making financial market nervous. Democrat and Republican legislators are required to come up with a budgetary understanding to strike a deal to raise the country s debt ceiling that could avoid a rating downgrade and long due correction in the market.

 

 

Courtesy: Business Recorder

 


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