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Rating agencies face credibility crunch

If there is scant market reaction to a downgrade of the US sovereign, rating agencies will lose face.

It is a dilemma: in an attempt to regain credibility, the ratings agencies are wielding the axe of a ratings downgrade for the US, and much ink is being spilled on the disaster that could ensue as they exert their power. But cutting the sovereign’s triple-A status might do far more damage to the ratings agencies than it would do to the US economy. Indeed, it could well be the largest indication of just how irrelevant ratings agencies have become.

This is because a downgrade might have no impact at all on the US economy. Money market funds that are restricted to investing in triple-A securities have already said that they will simply have their contracts rewritten so they can keep buying or holding treasuries. And even if there is a sell-off from that investor base, hedge fund managers say they are ready to step in and buy those treasuries. Demand for treasuries is not going to slow. And so long as demand remains strong, the cost to the US government of issuing debt will be controlled.

Furthermore, the notion of any debt being rated triple A has become something of a joke. More than half of all rated bonds are triple A – risk-free apparently.

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