The Road to Default: The Other Side of the Story

July 19, 2011
By

(This article was first published on The Dancing Economist, and kindly contributed to R-bloggers)

Okay so I was gliding through the articles of CNBC.com and stumbled upon one titled, "A Downgrade of U.S. Debt Won't Matter as Much as You Think." The argument laid down in this piece is that insurance companies and pension funds are required to hold high quality assets and that U.S. Government debt -no matter what rating is slapped on it- will still be the highest quality asset you can purchase.  My view is that although these institutions may not dump their treasuries- somebody else will.  To the extent that "somebody else" does will also dictate the losses these holders and the financial community sustain.
 On another note- John Carney writes in the same article:
It’s very likely that a downgrade of the credit rating of the U.S. would trigger a sell-off, but it’s far from clear that investors would sell U.S. government debt. More likely the investors would sell risk assets—equities, high yield corporate bonds, mortgage securities—and actually buy U.S. government debt.
It just doesn't make much sense to say that a downgrade by a ratings agency will cause people to buy more not less of that security.  Every single downgrade in the Eurozone has caused a sell-off, why should it be different here?

Keep Dancin'

Steven J.

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