Ratings agency Standard & Poor's has warned there is a one-in-two chance it could cut the United States' prized triple-A rating if a deal on raising the government's debt ceiling is not agreed soon.
Putting the U.S. on negative watch, S&P warned that it could cut the rating this month if talks between the White House and Republicans remain stalemated, adding that any cut would be by one or more notches.
TODD ELMER, CURRENCY STRATEGIST, CITI, SINGAPORE
Particularly as it comes in the wake of indications that U.S. policymakers may be closer to a budget deal than was implied by the high-wire politics of the past several sessions, it is possible that investors have come to the conclusion that the moves by the ratings agencies may actually raise the likelihood of a deal.
However, S&P's assessment appears to be less directly linked to the immediate debt ceiling issue as was the case with Moody's. Indeed, S&P suggests that they view the risk for a default as low and placed more emphasis on the need to put to the United States on a more sustainable medium-term path. This presents a much higher hurdle for policymakers and, as such, represents a more serious threat to the U.S. dollar.
OSAMU TAKASHIMA, CHIEF FX ANALYST, CITIBANK, TOKYO
The impact of S&P's move is very limited. Obviously, it's not a great move for the dollar, but contrary to what many people think, it's not such a grave development.
For Japanese banks to change their weighting in U.S. Treasuries, they would have to be cut by 4 or 5 notches, so there's no risk of change in their weighting as of now.
On top of that, while U.S. debt is an investment product for many banks and life insurers, it also serves as a guarantee of safety when they raise money, so it can't be just simply offloaded after a one-notch downgrade.
SELENA LING, HEAD OF TREASURY RESEARCH AT OCBC, SINGAPORE
Essentially it is adding to the risk aversion story. If you look at economic data, all is indicating a slowdown and on top of that you have political and policy uncertainties.
(If the United States loses its rating) it is going to be quite complicated. If markets are fearful they would normally buy the U.S. dollar or U.S. treasuries, but in this case because the attention is on the U.S. they would have to look at other safe havens (such as) the Swiss franc and the yen. The Singapore dollar could typically fit as safe haven within Asia, so in Asia there could be some asset relocations.
SEIJI KATSURAHATA, SENIOR ECONOMIST, DAI-ICHI LIFE RESEARCH
Warnings from rating agencies will likely prompt the Democrats and the Republicans to compromise and reach an agreement.
They know that if they don't reach an agreement, the nation will face troubles like Europe.
At the moment, financial markets are driven by the outlook for the U.S. economy and monetary policy. But if the United States cannot reach a deal before the deadline, the markets may take up the debt problem as their main theme.
DAVE COHEN, ECONOMIST AT ACTION ECONOMICS, SINGAPORE
They're turning up heat a little on the U.S. congress. It's not out of line with what they've been saying previously, and like what Moody's said. The message is clear, they have to go ahead and raise the debt ceiling so they don't technically default on any debt or will see their triple A rating downgraded.
If u look at the market, people still appear confident that this game of brinkmanship will be completed before the deadline and they won't allow the ceiling to expire without raising the limit.
The U.S. government will likely pass the debt ceiling because the risks are too great if they don't.
LI-GANG LIU, ANZ, HONG KONG
A temporary default of the U.S. debt would be a huge disaster for global financial markets. It would rough up the debt that is held as collateral and the result is all banks would have to raise their required capital to cover up losses. That would be a huge shock to the financial system.
The dire reality would probably get the Republicans to think twice. It's very likely that the debt ceiling would be lifted up. The issue is whether both parties can come up with a medium-term debt reduction plan.
ADRIAN FOSTER, HEAD OF FINANCIAL MARKETS RESEARCH FOR
ASIA-PACIFIC, RABOBANK INTERNATIONAL, HONG KONG
The bigger issue is ratings agencies need to be seen ahead of events. We were wondering why S&P didn't do this a few weeks ago. In that sense, this is the right thing for S&P to do.
Markets won't be able to shrug this off completely, but the United States is in a different position from other countries. This is not some fiscal reform program that they have to put in place. This is just political machinations.
It has less of a market impact, because we're programed to think the political machine will come through at the end of the day.
-- Developments in U.S. debt talks [ID:nN1E76B1W4]
-- The euro hit an intraday high of nearly $1.42 versus the dollar after the S&P announcement before trimming some of its gains. The dollar also fell against the yen.
-- U.S. Treasury slipped.
(Reporting by Reuters reporters in Asia; Compiled by World Desk Asia)