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Currency's Dive Points to Further Pain
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"This is arguably a critical question given that the U.S. Treasury's Aaa rating acts as the cornerstone of risk pricing in the global financial system," said Pierre Cailleteau, managing director of the sovereign risk unit at Moody's Investors Service and author of a report issued yesterday on the U.S. credit rating.
A loss of that status would probably mean that the United States would have to pay more to those investors, including foreign governments, that hold U.S. bonds. But the report said, "Moody's continues to view the foundations of the U.S. government rating as unshaken."
Similarly, John Chambers, a managing director at Standard and Poor's, said he viewed the United States as stable. Although some have drawn parallels between the current financial woes and those in Japan, which lost its AAA credit rating in 2001, Chambers said the United States has far greater ability to meet its obligations.
He noted that before Japan lost its AAA rating, its general government debt was more than 100 percent of its gross domestic product. By contrast, even figuring in "every last nickel" of the proposed U.S. bailouts, general government debt in the United States falls below 60 percent of gross domestic product, he said.
One key question for investors and multilateral lenders is how the U.S. bailout plan will treat foreign investors in troubled mortgage-backed securities. "A substantial amount of these securities are held by non-U.S investors," said John Lipsky, first deputy managing director of the International Monetary Fund. "Obviously, the disposition of the U.S. [toward these investors] will be important to determining future attitudes about investing in the U.S. versus elsewhere."
Foreign governments and multilateral lenders have been offering advice to the U.S. government as it moved in recent weeks to take over some financial institutions while allowing others to fail. The IMF has been subtly calling on the United States to take a broader approach to the financial crisis, and officials there applauded the administration's efforts in recent days to launch a more comprehensive plan to address core issues.
"Obviously, these events have been striking and potentially very troublesome, but the remedial actions being taken, if done right, will help to restore any confidence that might have been lost," Lipsky said.
As investors await final details of the financial rescue plan, some analysts noted that it will not address some of the economy's fundamental weaknesses, including poor housing prices and growing unemployment figures.
"With talk of the government buying assets at steep discounts and of an emphasis on taxpayer protection, the benefits to bank and thrift capital levels may be less than the market anticipates," Paul J. Miller Jr., an analyst with Friedman, Billings, Ramsey, said in a research note yesterday. "At this point, we just do not know. While the plan will most likely help, banks and thrifts still need to raise capital."
It is also unclear whether the $700 billion will be enough. Will banks be forced to open their books to their public, and how will their bad debt be evaluated? "It's not clear who is going to be allowed to participate," said Joseph Brusuelas, chief U.S. economist at Merk Investments. "How much will each individual bank be allowed to dump on the public?"
