The United States lost its top-notch AAA credit rating from Standard & Poor's on Friday, in a dramatic reversal of fortune for the world's largest economy.
S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about growing budget deficits.
GREG SALVAGGIO. SENIOR VICE PRESIDENT, TEMPUS CONSULTING, WASHINGTON D.C.
I really find it quite amazing that a credit agency that could rate mortgage backed securities AAA has decided to downgrade the U.S. government.
I think the forecast overstated by between $2-3 trillion, the Treasury alerted them of the fact and they decided to go ahead with the downgrade anyway.
In my job as an analyst, if my forecast were off by 2 million, or 200 million let alone 2 trillion it would make it incredibly hard to say to my peers that my analysis was sound.
I find it to be incredibly troubling from a ratings agency with a very terrible history in the last three years of its ability to quantify risk.
I'm a little bit fired up about it.
What Moody's and Fitch have really quietly agreed to do is say, 'We are going to wait and see what the commission comes up with before a downgrade,' but S&P went ahead and did it anyway with numbers that were wrong.
Traders put some credibility into the possibility of this downgrade. If you look at government bonds today, they closed down. Now we have to take a step back from our U.S. perspective, from an American pride perspective. Where else are you going to put your money right now? Europe is a mess....
I don't think there is going to be a mad rush to Swedish bonds, which is one of two countries that is still AAA.
DAVID MEGER, VICE PRESIDENT AND DIRECTOR OF METALS TRADING WITH VISION FINANCIAL MARKETS IN CHICAGO
One would expect the S&P downgrade to positively impact safe haven assets like gold, which continues to lead the safe-haven asset class. But, because the move was widely expected, we probably won't see a huge move on this news.
The industrial metals, like copper, may get hit from the move, because it will add to the already weak economic picture that sent it down today. Silver has been a laggard, and it has an industrial component, so it may not be able to benefit as much as gold.
This will put even closer scrutiny on Bernanke and the Fed this week to see if they will come up with QE3 or some type of stimulus plan.
DEAN POPPLEWELL, CHIEF CURRENCY STRATEGIST AT OANDA IN TORONTO
No one expected them to do it. They made sure Monday will not be boring! The dollar's woes will continue. Markets will apply further pressure on the dollar and equities. Investors will want to own the front end of the U.S. curve and sell 10s and bonds. The flight to quality trade will be extended.
BORIS SCHLOSSBERG, DIRECTOR OF CURRENCY RESEARCH AT GFT, NEW YORK
It's probably going to put a little bit more stress on the dollar when we open in Asia on Sunday night. It's the first time in history that the S&P has downgraded the United States. Even though most of the investors are not required to hold a triple-A rating, there' still a significant minority that may decide to liquidate at least some part of their U.S. holdings now that the downgrade is in effect. At least initially, the impact on the market will be negative because there will some forced liquidation of U.S. assets. I don't think this is an unexpected move.
(About the timing of downgrade)
They want the market to absorb the news over the weekend. It will mitigate the shock of the announcement. (Still), it may cause a pretty steep sell-off in Asia when we open as the market considers the significance of the news.
PIERRE ELLIS, SENIOR ECONOMIST, DECISION ECONOMICS, NEW YORK
It's not totally unexpected. It's just the suddenness of the move and according to the S&P logic, it's justified. I don't know that it's unanticipated by the markets. There might be a mild reaction, but it won't be very pronounced. The timing is a little accelerated but it's no surprise. The S&P was looking for a longer term fiscal adjustment and that has not materialized and is unlikely to materialize before the election.
IAN LYNGEN, SENIOR GOVERNMENT BOND STRATEGIST, CRT CAPITAL GROUP, STAMFORD, CONNECTICUT
The Treasury market to a large extent has anticipated either an official downgrade of the U.S. credit rating to double-A plus, or the looming threat. To some extent I would expect when Tokyo opens on Sunday that we will see an initial knee-jerk sell-off (in Treasuries) followed by a rally. The reason I would call it that way is because the Treasury market has shifted from trading off the flight to quality dynamic to trading off of U.S. fundamentals, and U.S. fundamentals -- despite the slightly better than consensus employment report today -- continue to suggest ongoing broader economic concerns with the potential for a double-dip recession.
When you look at what has happened to other triple-A rated countries who have lost that rating it has tended to be a bullish period, which has been characterized by lower interest rates. That is more a factor of the broader economic expectations than it is of what the ratings agencies are saying.
In the credit crisis of 2008 and 2009, the ratings agencies were dealing with a credibility issue. The fact that they have now downgraded the United States suggests to me that they are now going to be dealing with a relevance issue, because the fact of the matter is that 10-year (Treasury note) yields are near 2.5 percent, and that in no way suggests a lack of sponsorship for U.S. debt.
PAUL DALES, CHIEF U.S.ECONOMIST, CAPITAL ECONOMICS, TORONTO, CANADA
I don't think it will mean too much to be honest. There will probably be an initial market wobble -- fx markets might struggle and Treasury yields might fall a bit.
The bigger picture is really that the world is not much different than it was a few hours ago. People are simply going to focus on what is happening on the ground and that is the economic news.
VASSILI SEREBRIAKOV, CURRENCY STRATEGIST AT WELLS FARGO IN NEW YORK
It's not entirely unexpected. I believe it has already been partly priced into the dollar. We expect some further pressure on the U.S. dollar, but a sharp sell-off is in our view unlikely. One of the reasons we don't really think foreign investors will start selling U.S. Treasuries aggressively is because there are still few alternatives to the U.S. Treasury market in terms of depth and liquidity. It will probably put additional buying pressure on other safe-haven currencies such as the Japanese yen and Swiss franc. It will probably complicate the task for Japanese and Swiss authorities who are trying to curb currency gains.
STEVE BLITZ SENIOR ECONOMIST ITG, NEW YORK
I don't know how seriously everyone is going to take it. There is S&P and there is Moody's and we don't know if Moody's is going to follow with a downgrade of its own.
If you think about the things they have rated AAA over the past few years, then you think about the U.S. economy with 15 trillion dollars of income every year and it's never not paid its debt.
I think maybe S&P is under a lot of heat. I think the other side of it is they are also ready and willing to downgrade the whole financial system because the whole financial system holds its capital in Treasuries and it leverages itself off of that capital.
WILLIAM LARKIN, FIXED INCOME PORTFOLIO MANAGER, CABOT MONEY MANAGEMENT, SALEM, MASSACHUSETTS:
I think we are going to test the system on Monday. One of the problems that everyone is worried about with a downgrade is there is a lot of investment guidelines where you are forced to maintain certain credit quality, and if you are bumping up against it, all of a sudden you are going to fall below your guidelines, so that means you probably have to buy more Treasuries and probably sell corporate debt or something like that.
The interesting thing is going to be the impact on the municipal bond market because a lot of municipal bonds have as collateral U.S. Treasury securities. It is a tiny market and it is easily spooked but it is heavily invested in by retail investors. That is going to be the one I am going to be keeping an eye on.
When they finally dealt with the debt ceiling they obviously kicked the can down the road, and the market did not need that. I thought at the time when they released it there would have been a downgrade.
I don't think it is a great shock. If it didn't happen now I think it probably would have happened in a couple of months.
A double-A plus is not a big issue, but it is going to have an impact. There are going to be ripples going across the pond.