US financially downgraded 1st Time In Almost A Century, Big Blow To Reputation • Will Impact Markets

Washington/New Delhi: The United States, the world's largest economy, has lost its famed AAA rating, ending an era lasting almost a century in which sovereign bonds issued by it were branded risk-free. 

    The downgrade — the first since 1917 — by credit rating agency Standard & Poor's to AA+ has further fuelled uncertainty in an already weak global economic environment threatened by the possibility of defaults in Europe, a fragile recovery in the US, and fears of a double-dip recession. 
    Despite the US Congress agreeing to raise the debt ceiling and cut spending to avert default, S&P went by recent events to conclude that policymaking had become "less stable, less effective and less predictable than what we previously believed". 
    "The downgrade reflects our view 
that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge," S&P said. The S&P move comes within days of China's Dagong Global Credit Rating Co downgrading the US. 
    Though most major markets were shut on Saturday, traders are likely to spend a nervous weekend worrying what's in store for Monday when they open to a new reality. There are fears of a repeat of September 15, 2008, when they woke up to a world without Lehman Brothers. 
    The Saudi Arabian stock market, which was open, was clearly impacted. It closed 5.5% lower for the day. Crude prices are expected to ease amid fears of a fresh bout of recession. Those eyeing gold purchases should be prepared to pay more for the yellow metal which is seen as the safest investment bet in times of volatility. 
US HAS A GRADE FALL 
    What does the downgrade mean? 
Investors like pension funds that have to mandatorily invest in AAA bonds may shift 
    What does this mean for the US economy? 
It may be a turning point for the US which has retained its AAA rating since 1917 
    What does this mean for India? 
In the short-term, the impact may be negative. Global investors react to any negative event by moving out of risky assets into safe assets such as Swiss currency or gold. There may be pressure on the rupee 
    Where will investors go? 
With US debt accounting for 54% of AAA investments, there is no alternative market for investors that is deep enough. But for those keen on AAA investments, there are bonds from Germany, France, UK and Canada and also some blue chip companies It's a crisis, but don't panic: Pranab 
    Though the Indian government acknowledged that the situation was grave, it warned against any kneejerk reaction. "There is a crisis but I am not unnecessarily worried. We need not unnecessarily press the panic button," finance minister Pranab Mukherjee said on Saturday. He said the Indian economy would be able to withstand domestic as well as international shocks. 
    The assessment is that the immediate economic impact would be limited despite some strong words from China. "The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone. China, the largest creditor of the world's sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets," China said in a statement issued through state news agency Xinhua. 
    Russia and several Asian countries, including Japan, said they would stay invested in US treasury bills. But over the coming years, the cost of raising funds is likely to rise for Americans.