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So what exactly does a US downgrade mean


beerbaron
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With all the noise around I decided to make a simple logical exercise. What is the certain real effect of a treasury downgrade on the future profits of America's corporation:

 

On Banks

-If Treasuries are not AAA anymore then their Tier 1 capital decreases. Increases their financial leverage and risks associated with them.

 

Some people would think that this would dampen the recovery by reducing lending but it is not it. Banks have all been increasing their capital, because they just can't find anybody to lend to.

 

-If Treasuries are not AAA anymore yields will go down and interest rates up. Impacting spreads.

 

People are not stupid, they know the USA can print their own money. How could you fear default in that situation? Yields should be relatively unaffected by the downgrade.

 

On Insurers

-Insurers would likely have to increase their statuatory capital. Reducing the quantity of business they can do.

 

True, but their is an oversupply of capital right now in the insurance industry. It can only help to reduce the supply in the mean term.

 

On Businesses

-If yields do not change, there is very little impact.

 

True

 

On USA foreign lenders

-China will stop lending to the USA

 

China has been buying treasuries for their own interest. They do not intend to make any profit on those treasuries, they are just aiming at moving the manufacturing industry and fuel their growth by keeping their currency low. They know they will get 10 cents on their initial investment in 30 years. But who cares, they will have grew 13 times their GDP by then.

 

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