US Treasury bonds will remain the global standard even if the country is downgraded over its huge deficits, in part because there is no real alternative for investors, ratings agency Fitch said on Wednesday.
With Washington threatened with a cut in its coveted triple-A rating, Fitch said that a downgrade could spark short-term volatility in both the markets for US bonds and financial markets generally.
However, over the medium term, Fitch said, with a moderate downgrade to double-A, US Treasuries “would likely retain their standing as the benchmark security that anchors global fixed-income markets.”
It cited the bonds’ “unparalleled liquidity, unique role in the financial system, strong credit profile, and lack of a viable alternative.”
Even so, Fitch said, longer term the US could be challenged with investors seeking alternatives to the US Treasury standard.
“The underlying financial position of the US, along with many other sovereign borrowers, has deteriorated as a result of the financial crisis and recession,” Fitch said.
“However, the fundamental strength of the US economy and widespread perception of the US sovereign as a high-quality credit is likely to persist for the foreseeable future, even in a moderate downgrade scenario,” it said.
Fitch, Standard & Poor’s (S&P) and Moody’s ratings agencies have all warned that US debt could be downgraded if the US Congress did not raise the country’s US$14.3 borrowing ceiling by Tuesday next week, the date the Treasury says it will run out of cast to meet its spending commitments.
On July 14, Standard & Poor’s also warned it could downgrade the country’s rating within 90 days over the lack of a credible medium-term debt-and-deficit reduction plan.
Standard & Poor’s president Deven Sharma told a congressional panel on Wednesday that previous reports indicating Congress would need to make US$4 trillion in deficit cuts over 10 years to retain the top credit rating were inaccurate.
Sharma declined to be specific over how much deficit cutting would be needed to win S&P’s approval. However, he said some of the plans being discussed were in the range of what the agency thinks would be necessary for a credible attack on the US deficit problems.
Sharma and Michael Rowan, managing director of Moody’s, both appeared before the oversight subcommittee of the House Financial Services Committee. Sharma told the panel “there has to be a credible plan” to reduce the US debt burden.
He said some of the plans put forward would qualify as credible, but he said the agency’s analysts wouldn’t decide on a possible downgrade until all the details of a final plan were known.
Rowan said that while Moody’s had warned that it might downgrade the US debt, the agency was still reviewing the efforts in Washington to solve the problem.
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