The biggest story in the currency market this morning is news that Standard and Poor’s has put the U.K.’s Sovereign Debt rating on negative credit watch. This means that the U.K. now has a 1 in 3 chance of losing its prized AAA rating. I have written an extensive article on what this could mean for the British Pound and if the threat is is serious on FX360.com.
Instead, I think it is more interesting to talk about whether the U.S. could be the next country to receive a credit warning. According to the comments by the S&P, their fear is that debt in the U.K. could hit 100 percent of GDP in the near term. Yet the U.K. is not the only country to be up to their ears in debt. The IMF released a report in April that projects U.K. debt load to be at 66.9 percent of GDP compared to 70.4 percent for the U.S. and 69 percent for the Eurozone. The following chart shows the IMF’s estimated government debt as a percentage of GDP and it is clear that the U.K. is not running the highest debt load (click on image to enlarge).
Source: WSJ
S&P is starting to examine more G10 nations and there is a decent chance that the U.S., Germany, France, Italy, and Japan could come under review as well. There are major consequences to downgrading U.S. debt or even just putting on credit watch. I think that a physical downgrade of U.S. or U.K. is unlikely. The U.S. dollar is the global reserve currency and S&P may not have the guts to say that the “Emperor has no clothes.” This is one area where being reactive rather than proactive can actually benefit S&P.
Last week, in my article “Could America Really Lose Its Triple A Rating?,” I said “I think that ratings agencies talk a good game but they will problems following through. The consequences of downgrading U.S. sovereign debt is huge both politically and economically. Therefore Moody’s or any rating agency for that matter may be reluctant to the first to pull the trigger. Downgrading the U.S. is very different from downgrading Ireland. Based upon how the rating agencies have handled the credit derivatives bubble, chances are they will be behind the curve once again.
With that in mind, U.S. finances are deteriorating significantly, raising the concern of Asian nations. However if President Obama is successful at turning around the U.S. economy, America will be well equipped to meet its debt obligations. ”
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So, will the dollar replace the yen as the new carry trade currency?
Does the chart that includes the U.S. debt load include the unfunded social security and medicare liabilities?
Yes, the U.S. Deserves to lose it’s credit rating. The way they poorly manage money. I would not lend them one penny it would be a foolish investment.
As to what impact that will have on the dollar? Who knows with risk aversion it my make new highs.
For whatever kind of sense that makes.
I wondered if the market would wait until S and P downgraded to devalue the dollar. Its like anything else if they are talking about then it probably needs to be done.
Hi,
I need to exchange a substantial amount of HK dollars to Candian. No time limit. However, it would be nice if I can do the exchange by the end of this year or early next year.
It was at around $6 HK dollars to $1 Canadian dollars about 2 months ago in March 2009 but I missed that. Now it’s at around $7.15 HK dollars to $1 Canadian dollars.
Any ideas when will be the best time again?
Thanks.
Hoi