Fitch may bring down the US bond ratings if it defaults

Posted By: Religare
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Fitch may bring down the US bond ratings if it defaults
Fitch Ratings has warned the US government to slash the AAA ratings on the bonds issued by the government if it misses debt payments by August 15. The bonds which are seen as risk free investment worldwide may lose their credibility.

This situation may have huge global impact. "The idea that the US could threaten to default is a dangerous one. The reverberations in those global markets would be very severe. That's where the real risk comes in," St. Louis Federal Reserve Bank President James Bullard warned.

The country's lawmakers need to raise the $14.3 trillion debt ceiling which seems possible if the government agrees with large budget deficits. The bonds cannot tolerate loss in ratings and therefore the Fed will try everything to meet the bond payments in time. Even a short delay may hamper the reputation and result in reverberations in the global markets.

"The notion of flirting with a default on existing obligations flirts with irresponsibility," Richard Bernstein, chief executive of Richard Bernstein Capital Management LLC, said at the Reuters 2011 Investment Outlook Summit in New York.

However, the US government relies on past experiences and is confident about meeting the debts, though it has triggered some worries at the White House. The President has set the deadline as August 2 to raise the nation's legal debt ceiling.

The role of the rating agencies has become very dominant in today's world. If they could invite worries for the largest economy of the world on account of default, they could well do it for the other economies also.

Story first published: Friday, June 10, 2011, 8:30 [IST]
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