Fox News' vice president of business news, Neil Cavuto, said during the July 27 broadcast of "Your World" that a US credit downgrade would be a good thing.
"I would welcome a downgrade. I think that will be the pain that will wake people up," Cavuto said during a one-on-one interview with Fox commentator John Stossel. Earlier in the interview, Stossel said that a downgrade would not be good for the US economy.
The US is at risk of losing its AAA credit rating if it fails to raise the debt ceiling and make around $4 trillion in long term cuts to the federal budget, Standard & Poors said earlier this month. The US has until Aug. 2 to raise the current debt ceiling limit from $14.26 trillion, which the government busted through in April. If the debt ceiling is not raised, the US government will not have the spending authority to meet current payment obligations like federal employee salaries, health and retirement benefits. A bond default is unlikely because President Barack Obama could declare debt payment a matter of national security and pay bond holders.
However, the market is most nervous about a downgrade and the global ramifications of the US losing its triple A status for the first time in its history.
Wall Street is not looking forward to this possibility and many have moved into gold, silver and other commodities, or are building short dollar positions in the case of an eventual downgrade by any one of the three major rating agencies. S&P has been the most hard line about cuts, with Goldman Sachs saying that unless the US can find the $4 trillion in cuts the S&P is hoping for, a downgrade within the next three months is likely.
From a California hedge fund manager:
"People do not realize that a downgrade will be much worse than a default," says Joel Smolen, hedge fund manager at Axion Capital Management in San Rafael, Calif.
A US downgrade would make the overall costs of capital rise, because banks, corporations, and state governments would have to raise interest rates on new bond issues in order to attract new bond buyers. Investors would expect higher yields for the risks involved of lay payments, or outright default. As yields on debt increases, borrowing costs will rise for average Americans who have adjustable rate mortgages or in the process of getting an auto loan.
The view from Hong Kong:
"A downgrade will impact everything in terms of risk and return because investors will be looking for more return from the equity markets, too, if they can now get more interest from US bonds instead," says Agnes Deng, portfolio manager of the Greater China Fund (GCH), run by Baring Asset Management Asia Ltd. "A downgrade would create global systematic risk because there would be an equity risk premium now. The second thing is that the emerging markets like China are perceived as a higher beta market in the equity world and so that means when investors become risk averse, they don't want to hold high beta assets and there will be a lot of selling in Hong Kong and China. A downgrade will hit the markets hard."
Often in times of crisis, politicians can muscle in on ideological trends or pet projects. But as the US is spiraling deeper into debt as interest rates rise in an underperforming job market, with layoffs likely at the federal and state level, cuts to social programs would hurt the US recovery process.
"My biggest concern would be what a downgrade means politically, for policy," says Vlad Signorelli, global research director at Bretton Woods Research LLC, a boutique investment research firm in New Jersey. "If rates go up because of a credit downgrade in the middle of 9% unemployment it will be very dangerous."
Let's hope Cavuto's welcome mat doesn't get stepped on by S&P, Moody's or Fitch anytime soon.Also Read