Last week, our view was that the AAA rating for the United States will hold for the time being if the debate over the debt ceiling is resolved. However, this week’s downgrade by ratings agency Standard & Poor’s from the AAA to AA+ rating was unexpected.
So what does this mean for markets over the short to medium term?
The short term impact is being felt around the world now with markets falling heavily. The downgrade was unexpected and the repercussions on investor’s psychology have been enormous. The main difference between 2008 and the current turmoil is that the credit market is still functioning. It appears that the current fear has been predominantly caused by two factors including:
1. fear of another recession in some developed economies; and
2. a crisis of competency as markets question the ability for policymakers in Europe and the
US to effectively deal with their respective fiscal challenges.
In the medium to long term, the likely impact to the borrowing costs of the US may be fairly minimal unless more downgrades are made. The greater concern is the impact of weaker economic activities and for consumer confidence. The full implication is still hard to determine at the moment. As such, we believe many investors will take selective opportunities and the rest will likely remain on the sideline.
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