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Wednesday, July 27, 2011

Is USA ready for the aftermaths of credit rating downgrade?

Since the year 1941, USA has been enjoying top credit rating of AAA by Standard & Poor’s and this credit rating shall be downgraded if debt ceiling limit is not raised by August 2, 2011.
Credit rating downgrade shall result in future borrowing at higher interest rates and the same shall result in higher bond yields of existing bonds by 60-70 basis points.
Higher borrowing cost is supposed to increase borrowing cost by around $ 100 billion a year.
Along with the interest rate paid on US treasury products other lendings like mortgages, auto loans etc. which are linked to treasury interest rates, too shall be hiked.
Dollar index declined to seven week low due to uncertainty over the debt ceiling hike.
Unemployment figures for the month of June were as high as 9.2% indicating economy is not picking up as desired.
In the international context, largest holders of US treasury products China and Japan shall see erosion in their assets and could be forced to divest some of their treasury exposure and investing the corpus in gold or other countries' treasury products.


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