Wednesday, September 17, 2008 2 comments ++[ CLICK TO COMMENT ]++

The Unthinkable May Happen (Although I Don't Think It Will): Downgrade of US Soverign Ratings

What are the chances of USA's debt rating being downgraded? The unthinkable may actually happen at some point within the next 10 years if USA goes down the current path. S&P says that USA's balance sheet has weakened:

Pressure is building on the pristine triple-A rating of the United States following a federal bailout of American International Group Inc., the chairman of Standard & Poor's sovereign ratings committee said Wednesday.

The $85-billion (U.S.) bailout of AIG on Tuesday by the U.S. Federal Reserve “has weakened the fiscal profile of the United States,” S&P's John Chambers told Reuters in an interview.

“Lack of a pro-active stance could have resulted in further financial stress and put pressure on the U.S. triple-A rating,” Mr. Chambers said. “There's no God-given gift of a 'AAA' rating, and the U.S. has to earn it like everyone else.”


Ten-year credit default swaps, or CDS, on Treasury debt widened three basis points to 26 basis points, according to data from CMA DataVision. This means it costs $26,000 per year to insure $10-million of U.S. Treasury debt against default.

Five-year credit default swaps on Treasury debt were steady at 21.5 basis points. That compares to 9.8 basis points on German five-year CDS and 13.2 basis points on German 10-year CDS, CMA said.

USA is nowhere near being downgraded but it's amazing to think that they are even in a position for that thought to be entertained. As Jim Rogers has pointed out numerous times, England was essentially bankrupt in the 70's even though no one would have thought that possible.

Gold is rallying big time today and I guess it's obvious that some think that the FedRes is going to print money. I really hope that they don't. They have done an excellent job injecting liquidity into the system without printing money so far. It would be a shame if they started inflating their way.


2 Response to The Unthinkable May Happen (Although I Don't Think It Will): Downgrade of US Soverign Ratings

September 17, 2008 at 4:28 PM

It is becoming highly probable. The FNM/FRE bailout was in response to investors balking at forth coming auctions, which could have led to a failure at a Tsy auction. Today's news that the Tsy is printing money for the Fed rallied gold and with record deficits coming, the decline of the US is at hand.

September 18, 2008 at 11:11 AM

Yeah... I don't think the FedRes actually printed money but investors betting gold think otherwise...

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