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Getting a lot of attention this morning is a note from an arm of ratings agency S&P, which predicts that in the event of a US downgrade, US financing costs would rise by about $100 billion per year.The problem with this analysis, is that it assumes the market cares about credit ratings, which it doesn’t.
Japan has seen its sovereign rating downgraded over 10 times since 1998, and guess what: Its yields are lower than ever. In the short term, sure, shock news like this hurts, but the idea that the market price is somehow based on the ratings — and not based on actual market fundamentals — is arrogant. Or at a minimum, it’s very cute.
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