S&P Impact

Standard and Poor’s global rating has downgraded US long term debt rating from “AAA” to ‘AA+”  citing mainly two reasons.

1) US fiscal consolidation plan falls sort of what would be necessary to stabilize medium term debt dynamics.

2) US governance & policy making “less stable, less effective & has predictable “.

From 1917, this is the first time the health of the US fiscal policy is in question.

The US sovereign downgrade was not entirely unexpected by markets the world over. More

importantly, this rating action, albeit delayed, is yet another sign that the fall-out from the global financial crisis will be felt for many years to come.

The loss of AAA rating is likely to have a gradual and long-winding impact for the US’ standing in the world, the dollar's status, and the global financial system over the long-term.

Over the longer-term, global economic equations are set to shift significantly with concerted

efforts towards working out a new, alternative global reserve currency and likely gradual change in global reserves’ asset allocation mix towards gold and other commodities, high-potential emerging markets.

Already, Chinese policy makers are discussing ways to diversify the country's foreign exchange holdings away from dollars (one-third of its reserves) and how to encourage Chinese companies to invest some of the foreign reserves overseas.

However, US treasuries’ status as a “relative” safe haven investment is likely to continue over the medium term, given its stature as the deepest and liquid sovereign bond market.

The S&P action may trigger an automatic reaction from global markets, especially as the move coincides with the weakening global economy and spreading contagion because of sovereign debt issues in Euro zone.

The extra uncertainty could prolong the latest slide in equity prices. Heightened risk-aversion is likely to play out in the coming weeks and months.

While US bond yields are likely to spike in the short-term, they would not sustain at higher levels for long, since, once the dust settles, attention will once again turn back to the economic fundamentals, which are certainly consistent with low Treasury yields.

The US dollar will weaken owing to the rating downgrade and the perceived riskiness, causing EM currency appreciation as well as higher foreign inflows in Emerging Markets, including India, through both FII and FDI routes.

However, in case of any sharp currency movements, I expect RBI to step in and intervene in the currency market to limit the extent of INR appreciation.

The negative outlook assigned on the AA+ rating, will most likely ensure a tighter fiscal policy

regime in the US. It will be interesting to watch the trade-off between tighter US fiscal policies in contrast with a much looser monetary policy stance.

The interplay of these factors and their impact on US growth and inflation would determine the likelihood, timing as well as nature of further quantitative easing measures.

Now, the probability of a monetary expansion (in any form) in the US looks low in the near term but cannot be entirely ruled out in 2012.

RBI’s hawkish monetary stance is also likely to moderate going ahead given heightened global

uncertainty levels, weaker commodity prices and moderating domestic economic growth.

India will benefit from lower commodity prices in the long-term which will help in tacking inflationary challenges largely. This will be incrementally positive for Indian bond markets.

In addition, India is likely to be a beneficiary in terms of fund flows – both FDI & FII – in the medium-to-long term. Overall, while the short-term impact of the latest S&P action will be jittery for markets across the world, the eventual impact will be positive for Indian markets.

Disclaimer- This article is based on various data available on the internet. The author or this blog (www.yoursweetmoney.blogspot.com) must hold responsible for any wrong decision. You are hereby requested to crosscheck this article and content with your financial expert.

S&P: Asia would be hit harder by a second global crisis

A new global financial crisis would hit Asia harder than the last one, especially nations heavily exposed to offshore markets or still repairing budgets from the 2008-2009 crisis, credit ratings agency Standard and Poor's said on Monday.

The agency, which incurred Washington's wrath at the weekend by cutting its AAA rating by a notch to AA+, said it was not predicting a rerun of the credit crisis that crippled markets and tipped the world economy into recession three years ago.

But it warned of more sovereign downgrades in Asia next time around, if its assumptions turned out to be wrong.

"If a renewed slowdown comes, it would likely create a deeper and more prolonged impact than the last one," S&P said in a statement.

"The implications for sovereign creditworthiness in Asia-Pacific would likely be more negative than previously experienced, and a larger number of negative rating actions would follow. We wait to see."

S&P said it assumed Europe's debt crisis and Washington's debt problems were unlikely to lead to "abrupt dislocations" in the financial systems and economies of major developed nations.

On that basis, it added, its historic downgrade of the U.S. credit rating would have no immediate knock-on impact on sovereign borrowers in the Asia-Pacific.

It cited the Asia Pacific region's sound domestic demand, relatively healthy corporate and household sectors, plentiful external liquidity and high savings rates -- though it listed New Zealand, Japan and Vietnam as exceptions to this.

The S&P statement took on a much darker tone when considering the possibility that its assumptions were too rosy, noting that Asia still relied heavily on exports to the West.

"Given the interconnectivity of the global markets, an unexpectedly sharp disruption in developed-world financial markets could change the picture," it said, noting that the U.S. and European economies could again contract or stagnate.

"In this scenario, the experience of the global financial crisis of 2008-2009 shows that export-dependent economies with large exposures to the U.S. and/or Europe would feel the most pronounced economic impacts," S&P said.

"It's not likely things would be very different this time."

The agency listed those countries particularly vulnerable to disruptions in offshore capital markets as Pakistan, Sri Lanka, Fiji, Australia, New Zealand, South Korea and Indonesia.

It also said several nations, again including New Zealand, were also still repairing their government finances and could be more constrained in responding to a fresh global crisis.

"The adverse impact on Asia Pacific in that scenario would likely require governments to use their balance sheets to support their economies and financial sectors once again," S&P said.

"And in our opinion, most governments would promptly oblige. But some of them continue to bear the scars of the recent downturn -- the fiscal capacities of Japan , India, Malaysia, Taiwan and New Zealand have shrunk relative to pre-2008 levels."

Courtsey-http://in.finance.yahoo.com/news/S-P-Asia-hit-harder-second-reuters-1803524115.html