Experts comment on recent US downgrade in credit markets: Part 2

By Maureen Aylward

We asked our Zintro experts to comment on the recent S&P downgrade and its impact on the debt markets and other global markets. Clearly the markets are still reeling and shaking. Here is the second in a three part series on the issue as seen from a multitude of perspectives.

Kinuthia Karanja, a financial services expert, says that the S&P downgrade was ill advised and seems to have had ulterior motives. “The credit agency acted after the vote in Congress, not before. Nevertheless, on a timing basis, it provided a turning point in global stock markets and will surely cause concern amongst both Democrats and Republicans,” he says. “Main Street plunged into the chasm of economic depression after the real estate crash of 2007. And the Debt Crisis is an additional nail in the coffin, just as it was in 1931 when the European and South American Debt Crises cemented the depression. Great Britain defaulted on its foreign obligations in 1931. Could the United States be headed for the same fate by 2016?”

Al Rio, a risk analyst consultant, says that the extreme volatility in the markets is forcing many investors (individuals and corporations) to park their money in idling accounts that yield little benefit. See BNY Mellon, which last week announced that some depositors above $50 million will be charged for keeping the money there,” he says.

“It will take a time to clearly see the effects (months, maybe a year) on consumers. Changes in monetary policy (e.g., new rounds of so-called quantitative easing due to concerns of slowdown) can increase inflation. With positive inflation surprises come redistribution of wealth from lenders to borrowers; negative inflation surprises do the opposite. Such redistributions will increase bankruptcies, which means some providers will not get paid and some financial institutions will see loan quality worsen.”

Rich Bialek, a strategy consultant, says that the US downgrade is a reality check for the US and global economies. “It is a case where perception is reality. S&P’s perception of a weaker US economy is correct given the ratio of US government debt to equity, ineffective fiscal policy, slow to no growth, high unemployment, and even higher underemployment. In the immediate term, stocks will continue to fall in the US and other global equity markets,” he says. “The downgrade is not likely to increase interest rates for Main Street. Although our economic house is in need of repair, it is still the best house in a global neighborhood that has suffered. If the US economy of today is rated AA+, it is still stronger than any other economy. The downgrade is not relative to other current economies, but only to the US of five years ago.”

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