US Credit Rating Downgrade
08 August 2011
he most recent event expected to further shake the fragile recovery of developed world economies is the downgrade of the US sovereign rating by S&P to AA+, equivalent to New Zealand.
The financial press everywhere gave it a huge highlight and at times the tone of the articles were such that it would seem like armageddon was imminent.
Thinking more rationally, though, such move had been at least partially priced in by the markets. I did mention it in my earlier post that the market was already reflecting AA+ rating.
So the response of the G7 was too much on the dramatic side. The ECB's reponse, meanwhile, was more sensible. It had not much choice to contain the rout except by effectively doing quantitative easing, albeit by not buying the Italian and Spanish bonds directly from their respective governments.
Can we see things getting worse from here?
According to former British PM, Gordon Brown, the EU seemed to be taking wrong precautions.
And the US continued to have anemic growth, weak housing market, high unemployment.
So based on how things stand at the time of writing of this memo, one cannot be too optimistic.
Nevertheless, for those more adventurous, the opportunity in the equity markets has begun to emerge. One probably could do OK by selectively picking those with resilience and future growth potential.