Sunday, August 07, 2011
Goldman Sachs, in a bearish forecast, expects 2 percent growth in the U.S. for the next few quarters and a "significant risk, one in three, that we will go back into recession," senior economist Jan Hatzius told CNBC Friday.
"We have seen enough over the last two months to come to the conclusion that in the first half the underlying pace of growth was pretty disappointing, even if you adjust for [the disruptions in] Japan and adjust for fiscal policy," he said.
Rumors were swirling all day, and then it finally hit: Standard & Poor's downgraded the nation's credit rating Friday evening, the first time the U.S. Treasury has lost its pristine AAA rating since ratings began nearly a century ago.
S&P now rates the United States at AA+. The rating agency didn't beat around the bush when describing why it made the cuts:
The man who leads one of China’s top rating agencies says the greenback’s status as the world’s reserve currency is set to wane as the world’s most powerful policy makers convene to examine the implication of S&P’s decision to strip the United States of its triple “A” rating.
In comments emailed to CNBC, Guan Jianzhong, chairman of Dagong Global Credit Rating, said the currency is “gradually discarded by the world,” and the “process will be irreversible.”
On Friday night, when news broke that S&P had made a $2 trillion error in its analysis of the US debt situation, we kind of didn't believe it.
Basically we figured there might have been some issue, but that mostly the Treasury was trying to throw up a smokescreen to distract from the bad news.
But this WSJ tick-tock on the interactions between the ratings agency and Treasury over the last week really is kind of unbelievable.
Foreign exchange markets are bracing for heightened volatility on Monday morning as the reaction to Standard and Poor's lowering of US long-term sovereign credit rating to AA+ from AAA sets in.
It is obvious that global investors would consider diversifying their assets out of US treasuries. This move can apply pressure on the dollar. There is also fear that some funds which are not allowed to hold any asset without AAA rating might be forced to sell treasuries in the near term.
However, it is hard to envisage a total collapse of the greenback as no investor can claim that he was unaware of the state of the US economy or the risks associated with investing in dollar-denominated assets.
What is a downgrade?
Standard & Poor's, one of the three major credit rating agencies that assign scores to debt issued by institutions, municipalities, and governments, said there is a heightened degree of risk in holding debt issued by the United States. So it lowered its rating from the AAA, the highest possible level, by one notch to AA+. It also said the outlook is negative.
Why did it lower the rating?
The credit rating agency believes the outstanding debt of $14.3 trillion and projected deficits for coming years in the United States no longer warrant the top-tier rating that it had assigned to the United States since 1941. It also said that the political environment does not build confidence that the United States can agree on how to lower the deficit in a meaningful way any time soon.
The downgrading of US sovereign rating will negatively impact exports and moderate capital flows into the country but overall economic growth will remain robust at 8.2%, said Prime Minister’s economic advisory council chairman (PMEAC) C. Rangarajan.
“More than the downgrade what will be the impact for India and the rest of the world will be the slow pace of recovery of the US. It will have implication for trade flow and capital flow,” Rangarajan told PTI.
Stocks tumbled across the Middle East on Sunday as most regional markets opened for their first day of business following a historic downgrade of the United States' credit rating.
Mideast markets mostly operate Sunday to Thursday. That makes them the first to react to credit rating agency Standard & Poor's decision late Friday to cut the U.S. level one notch to AA+ from its top AAA rating. The only exception is OPEC powerhouse Saudi Arabia, which plunged 5.5 percent when it opened Saturday.
The Dubai Financial Market's benchmark index suffered some of the steepest declines, plunging more than 5 percent in early trading before trimming its losses. The index was down 3.8 percent to 1,482 points by early afternoon.
While the S&P downgrade weighed on the market, it was also dragged lower by a lower than expected quarterly profit from Arabtec Holding, the Emirati construction giant that helped build the world's tallest tower in Dubai. Arabtec shares fell 4.9 percent to trade at 1.4 dirhams (38 cents).
Investors remained jittery on fears of global economic recession alongwith high inflation and rising interest rates, with markets posting 5% weekly decline
Major news for the week
Food inflation at 8.04% versus 7.33%
India’s GDP to grow by 8.2% in FY12: PMEAC
India’s factory output falls to a 20-month low in July
Exports rise 46.45% to $29.21 billion in June
Bharti Airtel Q1 consolidated net profit down nearly 28%
Gold prices advanced on Friday, recovering from the previous session's drop, as global investors continued to put their faith in the yellow metal amid fears of deteriorating economic conditions in the US and eurozone. Investors also bought gold as an alternative investment as risky assets like equities and commodities seem to have gone out of favour for the time being on concern about faltering global economic growth.
Global events clearly overwhelmed the Indian markets. We didn’t fall as much as US and European markets did but still the fall was quite steep. The carnage was sparked by disappointing economic reports from various parts of the world. But, markets were particularly concerned about the signals coming out of the US. Even the clinching of the crucial US debt ceiling deal failed to lift the gloom.
Equity markets across the globe went into a tailspin, as panicky investors scurried for cover amid fears that the US economy was slowing down and the eurozone credit crisis will deteriorate. The selloff across world markets came despite the US Congress clearing a crucial legislation to lift the debt ceiling before the Aug. 2 deadline. The undertone was hit by a series of downbeat economic reports pointing to a deceleration in the US economy. Also, Moody's and Fitch warned that US' coveted "AAA" rating was still in danger of being downgraded. Economic data from other pockets of the world too showed moderation in economic activity, especially in the manufacturing space.