Mon, Aug 08, 2011 - Page 10 News List

US woes cast doubt on ‘AAA’ nations

ONCE UNTHINKABLE:S&P could lower the US’ rating again within two years if cuts in spending are not deep enough, interest rates rise or government debt increases

Bloomberg

Standard & Poor’s reduction of the US credit rating may make it harder for other top-rated countries to keep their “AAA” ranking, according to Mohamed El-Erian of Pacific Investment Management Co.

The downgrade by S&P “may well raise questions about other members of the dwindling ‘AAA’ club,” El-Erian, 52, the Newport Beach, California-based chief executive officer and co-chief investment officer at Pimco, the world’s largest manager of bond funds, wrote in an e-mail on Saturday.

S&P gives 18 sovereign entities its top ranking, including Australia, Hong Kong and the Isle of Man, according to a report last month.

S&P lowered the US one level to “AA+,” while keeping the outlook at “negative” as it becomes less confident the US Congress will end tax cuts begun under the administration of former US president George W. Bush, or tackle entitlements. The rating may be cut to “AA” within two years if spending reductions are smaller than the ones agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based firm said on Saturday.

Moody’s Investors Service and Fitch Ratings affirmed their “AAA” credit ratings on Tuesday, the day US President Barack Obama signed a bill that ended the debt-ceiling impasse that pushed the US Department of Treasury to the edge of default. Moody’s and Fitch also said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.

“Investors should be cautiously positioned as the global economy and markets face major uncertainties,” El-Erian wrote. “The downgrade will be a further headwind to growth and job creation in the US.”

About US$1.87 trillion has been erased from the value of US equities since July 22, including the 4.8 percent plunge by the S&P 500 on Thursday that was the biggest drop since February 2009. US stocks fell the most in 32 months last week, erasing the S&P 500’s advance for this year, as investors fled equities amid signs that the economy is stalling. Treasuries rose last week, pushing the two-year note yield to a record low.

“The once-unthinkable loss of the ‘AAA’ rating will constitute a further hit to already fragile business and consumer confidence,” El-Erian wrote.

He also said that Americans would face “higher credit costs” over time.

Meanwhile, billionaire Warren Buffett said S&P erred when it lowered the US credit rating and reiterated his view that the economy would avoid its second recession in three years.

The US merits a “quadruple A” rating, Buffett, 80, said on Saturday in an interview with Betty Liu at Bloomberg Television.

The downgrade followed the biggest weekly selloff in US stocks in 32 months, with the S&P 500 slumping 7.2 percent to its lowest level since November last year.

“Financial markets create their own dynamics, but I don’t think we’re facing a double-dip recession,” said Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. “Clearly what stock markets do have is an effect on confidence, and this selloff can create a lack of confidence.”

The S&P downgrade won’t have an impact on investment decisions in money funds and bond funds at Western Asset Management, Pasadena, California-based chief investment officer Stephen Walsh said. Western Asset, the bond unit of Legg Mason Inc, manages about US$365 billion in assets and has an “underweight” position in US Treasuries.

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