Sunday, July 31, 2011

Is a U.S. debt rating downgrade the end of the world?

The Wall Street Journal cites example of other rich countries that have suffered debt ratings downgrades:
Japan, Canada and Australia, among others, have suffered the ignominy of being downgraded from top credit ratings.

By and large, borrowing costs remained fairly steady and, in some instances, eventually declined. Stock markets wavered but generally rebounded, while the response in currency markets varied widely.

"When [a downgrade] happened in the past, was it the end of the world?" asks Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. "The reaction wasn't positive, but it wasn't extreme."

For the U.S., history suggests the outcome could even be a long-term positive if a downgrade prods policy makers to get the government's fiscal house in order.

While circumstances and economic paths differed, the impacts of the ratings change itself weren't significant, analysts say. One reason is that ratings changes are usually well-advertised in advance, allowing markets to adjust gradually. But more important for the markets than the ratings moves, analysts say, are the country's underlying economic trends.

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