U.S Treasuries are broadly considered the safest form of bond, nearly risk-free, and are used as a benchmark for many higher risk debt securities. Would a downgrade of United States debt from its current AAA rating cause a disaster for the markets?
In the video below, Reuters’ David Gaffen tells Felix Salmon that it’s not clear anything so catastrophic would occur in the event of a downgrade. Don’t miss the Spinal Tap clip:
Pimco’s Neel Kashkari takes another position in a weekend op/ed in the Washington Post. He says if you look at four factors to assess the likely impact of the ‘misproven truth’ of the stability of U.S. debt – strength of belief in the institution, size of the asset class, degree of wrongness of the belief, and economic context – we could have a market reaction on the magnitude of the Lehman bankruptcy in 2008:
These factors suggest that a U.S. downgrade has the potential to be as bad or perhaps worse than the Lehman shock. The more strongly held a belief, and the larger the asset class it supports, the greater the potential damage to the economy when the belief is turned upside down. We may not be certain what will happen if U.S. credit is downgraded, but there is no upside to finding out.
Sources:
“Felix TV: Will the US downgrade be a nonevent?” Felix Salmon, Reuters. http://blogs.reuters.com/felix-salmon/2011/07/27/felix-tv-will-the-us-downgrade-be-a-nonevent/
“Could a U.S. debt downgrade trigger a financial crisis?” Neel Kashkari, 7/29/11 Washington Posthttp://www.washingtonpost.com/opinions/could-a-us-debt-downgrade-trigger-a-financial-crisis/2011/07/28/gIQAW7OahI_story.html
