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US bonds from AAA to AA?
Old 12-07-2004, 08:19 AM   #1
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US bonds from AAA to AA?

I heard one of the rating agencies have considered downgrading US Treasuries from AAA to AA.

If this did happen by one agency
What effect could it have?
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Re: US bonds from AAA to AA?
Old 12-07-2004, 10:54 AM   #2
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Re: US bonds from AAA to AA?

Quote:
If this did happen by one agency what effect could it have?
First, was this rating agency given its credentials or its operating authority by a govt agency? Hmmm...

Second, if Treasuries are downgraded from their current "riskless" status, then what standard would we compare all our other risk assessments to?

But it's an interesting question. I'd think that a Treasury downgrade would create a huge demand for Berkshire Hathaway's AAA-rated bonds. Would this make Buffett a de facto Treasury Secretary? What role would he play in the Bush cabinet? Could he bring Charlie Munger along to take notes?
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Re: US bonds from AAA to AA?
Old 12-08-2004, 04:52 AM   #3
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Re: US bonds from AAA to AA?

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I heard one of the rating agencies have considered downgrading US Treasuries from AAA to AA.
This sounds like an urban legend. The dollar starts dropping, and some people start claiming that the sky is falling.

The rating of a bond or related investment is really based on the expected chances of it being paid back.

There is nearly a 100% chance of the US Treasuries being paid back. Why? It is impossible for the U.S. government to go bankrupt. Why? They can just print more dollar bills.

That's not to say that bad things can't happen -- printing too many dollars can cause inflation, or even hyper-inflation. But if the U.S. government doesn't pay money that it owes, the consequences are much more far-reaching than losing money from an investment.

The relative *value* of a US Treasury may be going down, if the dollar containues to slide. But if you lower US Treasuries from AAA to AA, then you have to lower all other bonds issued in the U.S. to a maximum of AA.
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Re: US bonds from AAA to AA?
Old 12-08-2004, 07:28 AM   #4
 
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Re: US bonds from AAA to AA?

I guess the true sign of the apocalypse would be if foreign investors ever stopped being willing to loan the US government money denominated in dollars, but rather, required that the bonds be denominated in say Euros instead.

At that point, it surely would be possible for the US government to default on it's debt, much like many Latin American countries continually default on their US$ denominated debt.
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Re: US bonds from AAA to AA?
Old 12-08-2004, 08:09 AM   #5
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Re: US bonds from AAA to AA?

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I guess the true sign of the apocalypse would be if foreign investors ever stopped being willing to loan the US government money denominated in dollars, but rather, required that the bonds be denominated in say Euros instead.
What will likely happen first is that various commodities will start to be priced in euros rather than dollars such as oil. Once that becomes widespread the euro will become the currency of international trade and at that point the lenders to the US will want euros instead.

http://www.money.telegraph.co.uk/mon...frontcity.html
Quote:
Russia is to start pricing its huge oil and gas exports in euros instead of dollars as part of a stragetic shift to forge closer ties with the European Union.

The Russian central bank has been amassing euros since early 2002, increasing the euro share of its $65 billion (40 billion) foreign reserves from 10pc to more than 25pc, according to the finance ministry.

<snip>

Oil is seen as so central to the global power structure that the choice of currency used for pricing has acquired almost totemic significance. The switch from pounds to dollars after the Second World War has come to symbolise sterling's demise as a world reserve currency.

If the dollar were ever displaced by the euro, it would lose the enormous freedom it now enjoys in running macro-economic policy. Washington would also forfeit the privilege of exchanging dollar notes for imports, worth an estimated 0.5pc of GDP.
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