6 Economists Explain What Would Happen If The US Got Another Downgrade

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Photo: Jay Tamboli / Flickr

When the U.S. got downgraded by S&P in 2011, stocks tumbled.  But many were surprised to see Treasury yields fall.And the risk of another downgrade by the credit ratings agencies is on the table.

For the most part, there’s no clear consensus on how the markets would react to another downgrade.

Some believe the markets have already priced in the possibility.  Some believe that the credit rating agencies have lost credibility.  Some think that we could see volatility.

We asked six top economists what would happen if the U.S. got downgraded again.

The market reaction to another downgrade won't be as bad as the 2011 downgrade

'I think the downgrade in 2011 has done most of the damage one can expect. I don't think there will be a big market reaction in the U.S. I think it's come at a time that people are attaching less value to sovereign ratings...markets seem desensitised to U.S. credit ratings.

'If it comes as a result of a default, then there will be more of an impact, but it will be because of the default, not the downgrade.'

Millan Mulraine, TD Securities

A downgrade would have little impact. Also, Treasury investors really have no alternatives.

'In terms of financial repercussions, there would be some short term volatility. But I don't think a downgrade, unless it by all three ratings agencies, will have an impact. The U.S. Treasury market is still the deepest and most liquid debt market in the world.'

'Even if there was a massive sell-off of U.S. Treasuries, then where would those funds go?'

Martin Schwerdtfeger, TD Bank

Wall Street's trading departments would face problems, but the U.S. will continue to be the world's favourite currency.

'A US ratings downgrade will be bad for the bond and stock markets and will present the fixed income, currency and commodities (FICC) trading divisions of Wall Street with a challenging environment with rapidly changing rates, a volatile currency market and widening credit spreads. But it will not be an end of the world event. Reserve currency takes a while to fall out of favour and the Euro crisis still makes the USA's credit 'the cleanest dirty shirt in the closet.''

Brad Hintz, Sanford Bernstein & Co.

Sentiment would hit the corporate credit markets harder than they would hit the Treasury markets.

'If the U.S. got downgraded, we think the risk in activity will be more shock to sentiment, which has a shock to the credit and risk market. And they would suffer more than U.S. Treasury markets.'

Lisa Emsbo-Mattingly, Fidelity

Treasury yields would rise, but it would be much worse if the US defaulted

'I think it depends why: If there's a full default and there's a downgrade I think that could be a shock to financial market. (There would be) a couple hundred point drop in the S&P 500.'

'If it is similar to 2011, when there was a downgrade because of political dysfunction and a perceived lack of willingness to pay, then there would be a smaller effect. On net, we would probably see (U.S. Treasury) yields rise.'

Mark Hopkins, Moody's Analytics

The bond markets may have priced it in, and the stock markets probably haven't. But it's not easy to price in the shock.

'Fixed income (markets) believe that the event is priced into the market, they're not surprised by the discussion. Equity people haven't priced it in, and they can't really. It's not something that effects the main drivers of the equity markets--it's more shock to sentiment. You can't really price in the possibility of a shock. I expect that bond yields will fall, equity prices will fall, and the dollar might weaken.'

'With two downgrades, America will officially have a AA rating. Whether or not there is any adaptation that is required is the unknowable.'

Drew Matus, UBS

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