US sovereign Downgrade impact : The Thunderstorm

Standard and Poor's, alongwith other rating agencies had kept US's AAA/ rating on Credit Watch in March and were to review in Mid July. Accordingly, S&P, had expressed 'Dissatisfaction' reflecting the U.S. Debt  over Extended Debate. The US Law makers failed to plan  for the ' Debt Reduction' and/or the method to raise money either through ' Increasing Taxation' Or through 'Cutting Spending'.

As promised Standard and Poor's went ahead and downgraded US Sovereign Ratings to AA+. 



                                    S&P had discussed about the implication of this Action, 

1) We would downgrade the debt of Fannie Mae, Freddie Mac, the ‘AAA’ rated Federal Home Loan Banks, and the ‘AAA’ rated Federal Farm Credit System Banks to correspond with the U.S. sovereign rating. 






2) We would also lower the ratings on ‘AAA’ rated U.S. insurance groups, as per our criteria that correlates insurers' and sovereigns' ratings. 


3)  In addition, we would lower the ratings on clearinghouses Fixed Income Clearing Corp., National Securities Clearing Corp., and Options Clearing Corp. as well as on The Depository Trust Co., a CSD. 

This reflects our view that their clearing businesses are concentrated in the domestic market and they are correlated with the U.S. economy. We assess the impact of this scenario as moderate for funds and low for all other financial institutions sectors.

4)  Impact on Funds:
 a) The ratings implications for FCQRs and PSFRs would vary. Would have an impact on funds with exposure to long-term U.S. Treasury and U.S. government securities, but not on funds with short-term investments. For FCQRs, we apply a lower credit score on investments in short-term (365 days or less) U.S. government securities than longer-term investments (more then 365 days). The 73 FCQRs that we placed on CreditWatch negative have significant exposures to U.S. Treasury and U.S. government securities that mature in more than 365 days.
 We would downgrade these 73 funds to reflect the lower long-term rating on the U.S.
  { Principal stability funds, on the other hand, seek to maintain stable and accumulating net asset values, and they invest in short-term debt instruments. As long as the short-term U.S. sovereign rating remains at ‘A-1+’, as we outline, we believe that lowering the long-term rating into the ‘AA’ category would not have an impact on the ratings on these funds because the credit quality of the U.S. would still meet the credit quality standards for all PSFR categories. Barring any potential price volatility associated with the lower long-term rating, the short-term rating on the U.S. government remaining at ‘A-1+’ would effectively be business as usual for the money market fund industry }

All other global financial services:

5)   We would expect there to be few rating actions (including outlook changes) on specific companies. In most cases, this would reflect that their businesses, operating earnings, and assets are largely U.S. based. In either instance, we don’t expect liquidity to be a critical issue for companies. Furthermore, we do not expect the knock-on effects of the lower U.S. sovereign rating in scenario 2 to lead to additional downgrades immediately in the financial services industry.
 6 )  In these scenarios, we would evaluate each company on a case-by-case basis, taking into account macroeconomic conditions and their own financial strength. If we do take rating actions, we could expect to downgrade companies that have a significant U.S. presence, with most of their business and assets in the U.S., or companies in Europe with sizable positive correlations to the U.S. insurance or banking sectors.
7)   We would take fewer rating actions, and more slowly, on financial services companies in Asia-Pacific and Latin America--if indeed we took any.


Conclusions : US down grading may Have Massive Loss of Confidence and Confusion. Recently, I posted many views from Alan Greenspan, PIMCO, And Neil Kashkari, all propounded this. I had Predicted this as ' Black Swan Event' which Market Had not Envisaged and Leave Only factored.
1) The Housing Market and Housing Finance in US and Europe shall have Deep Crators.
2)  The 401( K) Funds and Other Pension funds, Insurers like AIG, Berkshire, MET, Prudential.
3)  The Excessive ' Cash Rich ' Companies like Apple, Microsoft and Bankers will have Treasury Losses. 
4)  The ' Value Erosion' might Have Compounding Effects on Commodities, Trading Houses.