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Of COURSE global investors care about credit ratings. What sophisticated investor do you think is not interested in data on the creditworthiness of the party to which they lend money?
Um... pretty much anyone who was paying attention in 2008, when ratings agencies were shown to be conducting some low-grade dog-and-pony show.
If a AAA rating meant nothing in late 2008, then why does a downgrade from it mean anything now?
Good post
The bottom line is a downgrade will have catastrophic effect on the economy, and don't think you're "safe" because you haven't "behaved foolishly" as many in this thread have poo-poohed. Business will close, unemployment will rise, foreclosures will accelerate. Globally, the world will stop looking at the U.S. as the world's leading economy. China and the EU will gladly take that role from us.
That isn't the issue. The issue of those who "haven't behaved foolishly" is that they who have not will have more buying power. Think of it as a game, you start at 0 and I start at -50. You do not have a deficit. You will experience the same hardships of the environment, but you won't be behind as I already am. Even If I lose everything I have, I will still likely be in debt to another. That means, whatever I earn will have a chance of being sought after while since you don't have any debt, you will be in the plus.
This is the issue. Those who bought a home and their payment is well within reasonable (and believe me, a lot of people do not plan for "reasonable") then they will be able to make ends meet enough to at least survive. Maybe not all, but many of that nature will. Those who live at the edge will have NO CHANCE of doing such as any economic trouble is a direct effect on their circumstance.
Do you know that only around 1% of the nation owns its own homes? did you know that only 1% actually has a credit rating within 800-850? MANY people are living at the extent of their earnings, living on their credit, not their income and when interest rates rise, these people will suffer the toll.
Businesses will close, jobs will be lost, BUT those who have planned, who have been conservative in their expenses and financial reach will have numerous opportunities opened up for them. The family that saved 20-30% down for a home before such dire times will be able to actually buy outright some homes with that money.
Those with excellent credit rating will be put to the top of the list for bank risk investments. Things will tigten up and will be hard for ALL, but... those who planned, those who didn't spend unwisely will have an extreme advantage. Such as it always should have been until government stepped in and started fixing the books. This is the nature of a free economy. Its harsh, its a hell of a lesson learner, but it also has the ability to turn a pauper into a prince.
a downgrade does not increase your credit risk. It CAN increase the likelihood that investors will perceive you to be a credit risk.
say we default -- the default itself, and the details of how we manage it, is what will determine the perceived credit risk to borrowers. I have not seen any compelling reason thus far as to why anyone would listen to the credit rating agencies.
It would effect interest rates. Rates would start to climb as risk climbs.
Greek 2 year bonds are yielding 40%.
And through every downturn there is an upturn.
Heck, CD's have been a crap poor investment since rates have been so low. As interest rates go up, so do they. Sure, you have less money to spend, but now your money makes more as you invest.
A poor economy makes a poor man who saves more money than a rich economy does.
"I doesn't matter what you think; This is the INTERNET and what I say WILL GO!"
Banks have already said that interest rates will go up if our credit rating goes down to AA.
Can't you read news reports?
Will interest rates on mortgages, car loans, student loans and credit cards rise?
Yes. Like any average Joe or Jane who misses a credit card payment, the U.S. will be socked with higher borrowing costs if it defaults on its debt. If the U.S. loses its coveted triple-A rating, which is expected, the cost to service its debt will rise. And that will have a significant ripple effect.
Greg McBride, senior financial analyst at Bankrate.com, says either a ratings downgrade or debt default would result in higher borrowing rates for consumers and businesses alike. “More of a concern is that a prolonged default could cause credit markets to freeze altogether, and we will have real problems,” he says.
It’s impossible to speculate how much rates will go up, he says. ”There are a lot of variables at play. The downgrade will lead to a more modest increase in rates. However, that increase would be permanent.” Folks who have variable debt such as a credit card balance or adjustable-rate mortgage can take a little comfort in this: “You are going to see higher interest rates eventually, anyway, because rates are so low,” McBride says.
Alas, consumers won’t see higher rates on saving products, such as certificates of deposit or money market accounts. “Those products won’t improve until loan demand picks up, any downgrade or default will only hold back loan demand,” McBride says.
Answers to the 7 big “what-ifs” of debt default | Reuters Money (http://blogs.reuters.com/reuters-money/2011/07/29/answers-to-the-7-big-what-ifs-of-debt-default/ - broken link)
a downgrade does not increase your credit risk. It CAN increase the likelihood that investors will perceive you to be a credit risk.
say we default -- the default itself, and the details of how we manage it, is what will determine the perceived credit risk to borrowers. I have not seen any compelling reason thus far as to why anyone would listen to the credit rating agencies.
It's an aftereffect downgrade.
When they downgrade you, you have already taken on too much risk for that AAA rating.
That's why several economists think we're going to get downgraded anyway no matter what Congress does.
Then again..the rating agency heads had a meeting with members of Congress this past Wednesday so maybe we'll continue to keep that AAA even though we don't deserve it.
I sure wouldn't mind 5-10% CD rates though.
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