Sense on Cents

The Wall Street Journal is reporting that Standard & Poors has just downgraded the credit rating of the United States from a AAA rating.

This is a HUUUUGE story. What do I see as the implications?

1. Short term lending markets will get tighter and activity will likely decline as the quality of what had been the highest quality collateral, US Treasury debt, is now downgraded.

These short term lending markets, also known as the repo market, are the liquidity in our financial markets’ engine. As the liquidity lessens and the cost of doing business increases, overall activity in the markets will be negatively impacted.

2. Other entities which had owned and used US Treasury debt for collateral purposes will be negatively impacted by the higher costs of holding lower quality debt. Other entities which were closely aligned with the US Treasury, such as Freddie and Fannie, will also be negatively impacted in terms of higher borrowing costs.   (more…)