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Tuesday, June 14, 2011

US Debt Ceiling Limit, a Nightmare for World Economy

World’s leading rating agencies Standard & Poor’s, Moody’s and Fitch, were earlier scoffed for not taking the cognizance of sovereign debt bubble formation in the PIGS (Portugal, Ireland (originally Italy) Greece, Spain) countries; but now these rating agencies have made it clear to USA that it’s ‘AAA’ rating should not be taken for granted and the same can be doe away unless debt ceiling is not raised before the dead line which ends on 2nd August 2011.
These ratings show how likely a creditor will be paid back; more the rating, better for the creditor.

Lower credit rating means US shall have to shell out more interest on its treasury products, which so far being secure, were willingly bought by countries like Russia, Japan and China.This shall further put pressure on mammoth US debt which is about 97% of US GDP.
Higher interest rates shall have negative impact on bond values too and banks, insurance companies, and various fund schemes, which invested in US treasury products shall see erosion in their assets.
China, which happens to be the leading investor of US treasury products; is at present, voluntarily forced to slow down its economy to combat the inflation and to ward off possible asset bubble; too shall be hit badly by this erosion.
It is very difficult to predict ramifications of all these equations on overall world economy, but one thing is evident, if US manages to get debt ceiling raised before the deadline, economic turmoil could be postponed atleast for some time.
Investors shall be better, if they sit on the cash, and those investors who are not long term investors and can’t do accumulation in major fall; should book profit on their investment. 

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