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Tuesday, August 9, 2011

U.S. historic downgrade

Last week, Standard & Poor's reduced the national AAA credit rating one notch to AA+, while maintaining the negative long-term outlook.
The downgrade means the U.S is no longer default risk-free but some analysts have noted that the new default setting for the risk-free may become AA+. One example of this can be the response from finance ministers from the world's largest economies affirming their support for the U.S. Treasury and reinterating that they wouldn't change their investment policies in regard to U.S. debt.
Another example that we have seen this week is the run for safe assets such as the 10 year US Treasury (chart below). Despite of the downgrade, investors are migrating to the US treasuries.
The long-term consequences of U.S. unsustainable federal budget picture are now staring straight in the face and tough decisions will need to be made soon on how much they can afford to spend on Social Security, Medicare, Medicaid and other social programs. Tax structure and non-entitlement structure may also need to be reformed.