By: Dr. Mike Campbell
Moody’s is perhaps trying to portray itself as being even-handed. Hot on the recent downgrade of Irish credit to junk status, the ratings agency has suggested that it may downgrade the credit rating of the world’s largest economy (and one of the world’s most indebted nations) the USA.
Whilst Irish, Greek and Portuguese debt is important, in terms of the total size of the economies involved, it is a relatively unimportant matter, in global terms: the greatest significance lies in the knock-on effect on the Euro, the currency they share. However, a change in US credit worthiness is a very different beast. The Greenback is the world’s reserve currency and is accepted by businesses to settle debts globally. The Federal Reserve Chairman, Ben Bernanke, said that a US default on its debts would cause a “major crisis” and that it "would send shockwaves through the entire financial system". The reason that this is being discussed is that US politicians have yet to agree to raise the ceiling on US deb; if they do not agree to more borrowing, the US will be forced to default on some of its obligations as early as next month.
Moody’s has said it will review the USA’s coveted AAA credit rating in light of the political impasse and the small, but real possibility that the politicians will fail to agree to raise the borrowing limits in time. Any downgrade of the US’s credit rating would mean that their borrowing costs would be driven up. President Obama is hosting meetings with senior members of the Republican party, but despite four days of cross-party meetings a deal is not yet in sight.
The price of gold has climbed to a new record of $1594.16 per ounce on news of the latest developments. The precious metal is seen as a safe haven in times of economic turmoil, so it may well climb higher whilst the political brinkmanship continues.