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Tuesday, July 19, 2011

August 2nd- the Countdown Begins

On 2nd August federal government shall reach at the threshold of its borrowing authority unless debt ceiling limit is raised.US government unable to raise this limit without republican support and republicans shall support only when their criteria are met.
If debt ceiling limit is not raised before the aforesaid date, USA shall default on some of its treasury products and if this happens USA shall face the credit rating downgrade which means new debt at higher interest rates; which is nothing but a step towards vicious debt trap.
This shall have contagion effect on the world economy and countries like China and Japan, who hold substantial US treasury products, shall face erosion of their asset value.
Fears among investor can be easily felt from the soaring gold price. As Gold is supposed to be safe haven during the financial turmoil, buying is gold increased substantially.
Since 1st July, gold has been appreciated by 7%.
Presently USA enjoys AAA credit rating, and in case of defaults it may be downgrades.
Earlier Canada and Japan too meted credit downgrading in the year 1993 and 1999 respectively.
It took almost 9 years for Canada to reclaim the previous credit rating while Japan is still 2 notches below AAA rating and there are no signs of getting out of it as its present debt which is around 230% of its GDP.

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