The Cost of a Downgrade?

by Andrew Stuttaford
The ratings agenncies are what they are, and Wall Street forecasts are what they are, but this report (from Bloomberg) ought nevertheless to be food for at least some thought::

Political wrangling over a plan to reduce the deficit may cost the U.S. its AAA rating, adding $100 billion a year to government costs while dragging down economic growth, according to Wall Street bond dealers. A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 to 70 basis points over the “medium term,” JPMorgan Chase & Co.’s Terry Belton said today on a conference call hosted by the Securities Industry and Financial Markets Association. Standard & Poor’s, which has given the U.S. a top ranking since 1941, reiterated on July 21 that the chance of a downgrade is 50 percent in the next three months and may cut the nation as soon as August.

“That impact on Treasury rates is significant,” Belton, global head of fixed-income strategy at JPMorgan, said during the call held by the securities industry trade group. “That $100 billion a year is money being used for higher interest rates and that’s money being taken away from other goods and services.”  

Of course, if what emerges from this process is a plausible rearrangement of the nation’s finances, all will be well, but that’s quite some if…