Standard & Poor's recent decision to decrease the rating forecast for the USA from “stable” down to “negative” raised concerns among the holders of the US T-bonds. China is considered the biggest holder of the US T-bonds ($1.150B). Among other T-bond holders are Japan ($ 890,3B), UK ($ 295,5B) and Russia ($ 130,5B) etc.
The head of the analytic center under the People’s bank of China said that it was time to think about the ways to decrease the potential damage that could be done by significant fluctuations of prices in the US bond market and by the depreciation of the US Dollar.
Why did Standard&Poor's decrease the USA’s credit rating?
According to Howard Friend, chief analyst for MigBank (a Forex broker), Standard&Poor's did this for a number of reasons:
· The USA’s huge budget deficit which is expected to reach $ 1,650B this financial year (or 11% of the national GDP)
· The USA’s public debt (over $14.000B)
· The absence of efficient programs aimed at reducing the sovereign debt and budget deficit.
One of the possible scenarios is the default of the USA as the new bonds that will be issued to cover the previous debts may stay unclaimed.
What are the possible threats for foreign investors?
A possible default is a very unlikely scenario. However, the measures that will be taken to avoid a default may affect investors around the world:
· In order to make investors interested in new T-bonds and to cover the credit risks Washington will probably increase the bond yield, which will mean inevitable losses for the holders of the previously issued T-bonds.
· The depreciation of the US Dollar affects the holders of the US securities. For example, when USD loses 1% of its value against EUR, China loses over $10B from the US T-bonds.
· The weak US Dollar will exert inflation pressure on importers. First of all it will affect Beijing’s financial interests.
Are there any reasons to be optimistic?
The US financial market is considered one of the most secure markets in the world. That is why during the times of instability and economic crises foreign investors prefer to invest in the US T-bonds:
Despite Standard & Poor's pessimistic forecast, according to the Fed Res, during the last week numerous foreign central banks bought the US T-bonds to the net amount of $14B.
The reduction of the budget deficit by $4 trillion will allow Washington to save about $1 trillion on public debt interest alone.
Washington has already announced the program aimed at reducing the US public debt down to 2.8% of the national GDP within the period of 2015-2020.
President Obama’s Administration is developing a tax reform, which is expected to bring at least $1 trillion to the US budget.
What are the mid-term perspectives of the US currency?
Judging by the current situation, the Department of Volume Analysis of provides the following info:
In mid-term perspective EURUSD is moving in the 1.4490 - 1.4565 price range. 1.4490 is last week’s max volume cluster (7800lots). 1.4565 is this week’s volume cluster (over 2000lots).
A breakout and consolidation above/below the upper/lower border of the range will determine the direction of the forthcoming price movement.
Annotation:
MIG BANK is a Forex broking company, which provides its clients with high-quality services in more than 120 countries around the world and in 20 languages. It is the first Swiss bank specializing in Forex. MIG BANK can boast the most advanced and safe trading infrastructure, which allows the company’s clients to enjoy optimal trading conditions, hi-end technologies and excellent support.
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Can the USA really default on its debt?
· No, it cannot. It would be even worse evil than the weak US Dollar.
· Yes, it can if there is another wave of the global economic crisis.
