If US Loses Triple-A Rating, Almost Anything's Possible

[dkf]

The debt ceiling has been the chief source of market angst lately, but that's a short-term problem.

The greater concern is: What happens if the United States, the risk-free benchmark from which all other assets in the global financial market are priced, loses its coveted triple-A rating? Nobody knows for sure.

But as James Melcher, founder and president of Balestra Capital in New York, puts it, "If the impossible occurs, everything else becomes possible. It would have psychological repercussions that could be serious, and that certainly sets the stage for things to deteriorate."

http://m.cnbc.com/id/43809671/If_US_Loses_Triple_A_Rating_Almost_Anything_s_Possible

[BzaDem]

1. People really don't have anywhere else to put their money. The was the case last week, and it will

remain the case a week from now.

[dkf]

2. The problem is the potential repricing

From the article: The long-run cost could be great in terms of a re-pricing of U.S. assets and an erosion of the U.S. ability to finance itself cheaply in a currency that it alone can print.

Funds with big holdings of U.S. Treasury debt would probably see yields rise and prices fall, hurting returns.

General U.S. government bond funds held $28.2 billion at the end of June, according to Lipper, a Thomson Reuters service.

Primary dealers use Treasuries as collateral for loans, so a downgrade could also prompt a wave of margin calls and a scurry for cash that hits the value of everything from stocks to corporate debt.

Snip

Colleen Denzler, head of fixed-income strategy at Janus Funds, said that means as much as 72 percent of the Barclays U.S. Aggregate bond index could be at risk of downgrade.

[BzaDem]

4. Repricing would only occur if demand for treasuries were to significantly drop. As I said, they have

nowhere else to go that's any better in the long term. There might be a few weeks of drama, but there is no alternative world reserve currency for the long term.

[banned from Kos]

3. It would be a financial and fiscal disaster - Many mutual and pension

funds are prohibited by charter from holding non-AAA instruments. The market would dump Treasuries and new borrowing would suffer.

It would be an instant austerity program. The House is a threat to our nations finances.