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An answer to the question we're all wondering- "What happens now" answered well in a planet money from a couple of weeks ago: http://www.npr.org/2011/07/18/1381

by pitdesi 15y ago

An answer to the question we're all wondering- "What happens now" answered well in a planet money from a couple of weeks ago: http://www.npr.org/2011/07/18/138164761/what-happens-if-u-s-bond-ratings-are-downgraded http://www.npr.org/2011/07/18/138164761/what-happens-if-u-s-... TL;DR - "I'm not sure it will have any impact. When you look at the bond market — 10-year U.S. Treasuries, for example — where is it today? In the light of all this hype about debt ceilings and possible defaults, it's at 2.93 today, so this is an extremely low interest rate in both nominal and real terms. It means that everyone in the world is willing to hold these bonds and is not the least bit worried about the possibility of a default. So, investors haven't changed their view of the creditworthiness of the United States at all, and I don't think they're likely to in the foreseeable future." -Mark Weisbrot, co-director of the Center for Economic and Policy Research

marcamillion 15y ago
The reason yields have been so low is because a) there is no other 'safe haven' for investors to flock to, and b) the markets generally didn't anticipate a downgrade. A downgrade, even if the markets don't raise Yields, can be catastrophic because many financial institutions (mutual funds, insurance companies, unit trusts, etc.) can only hold AAA rated securities in their portfolios - and some central banks can only hold AAA rated securities as collateral in some situations. So, legally, they will not be able to hold on to American gov't debt, even if they wanted to. The mere fact that a ton of people will be flooding the market with debt, will push up yields and that will lead to other catastrophic consequences. I expect that the Fed will buy a ton of bonds to push down yields and keep the Treasuries Interest costs low - but they will have to print a ton of money to do that....which will lead to inflation, which leads to higher yields which leads to higher interest costs, and creates a crazy cycle. You get the idea. However, that's just theory - in a perfectly balanced global economy that's not fragile. In this global economy, I suspect that there might be a concerted effort to loosen standards to prevent a mass exodus out of US Treasuries, but at least this sends a strong signal that the ratings agencies are serious.
- puredemo 15y ago
  How does this play out with the multiple ratings firms though?
  - marcamillion 15y ago
    Good question...I think the actual legal rules are probably something like you have to maintain AAA from 2 out of the 3 rating agencies or something of that nature. They do account for multiple ratings agencies having different opinions.

by pitdesi 15y ago

marcamillion 15y ago

The reason yields have been so low is because a) there is no other 'safe haven' for investors to flock to, and b) the markets generally didn't anticipate a downgrade. A downgrade, even if the markets don't raise Yields, can be catastrophic because many financial institutions (mutual funds, insurance companies, unit trusts, etc.) can only hold AAA rated securities in their portfolios - and some central banks can only hold AAA rated securities as collateral in some situations. So, legally, they will not be able to hold on to American gov't debt, even if they wanted to. The mere fact that a ton of people will be flooding the market with debt, will push up yields and that will lead to other catastrophic consequences. I expect that the Fed will buy a ton of bonds to push down yields and keep the Treasuries Interest costs low - but they will have to print a ton of money to do that....which will lead to inflation, which leads to higher yields which leads to higher interest costs, and creates a crazy cycle. You get the idea. However, that's just theory - in a perfectly balanced global economy that's not fragile. In this global economy, I suspect that there might be a concerted effort to loosen standards to prevent a mass exodus out of US Treasuries, but at least this sends a strong signal that the ratings agencies are serious.

puredemo 15y ago
How does this play out with the multiple ratings firms though?
- marcamillion 15y ago
  Good question...I think the actual legal rules are probably something like you have to maintain AAA from 2 out of the 3 rating agencies or something of that nature. They do account for multiple ratings agencies having different opinions.