16 Oct 2013
Flash: Fitch and the AAA conundrum - Societe Generale
FXstreet.com (London) - Sebastien Galy, strategist at Societe Generale said “I was asked by the Canadian press to comment on the statement from Fitch last night”:
'The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This "faith" is a key reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns.'
Key quotes:
“This is a misunderstanding of global imbalances. The US trades as a triple AAA because the world is financing a higher degree of consumption in the US. The alternative would be to let the USD fall vs the rest of the world, largely wiping out the manufacturing and export industries in emerging markets”.
“As the speed with which this imbalance can adjust is slow, the US finds it easy to finance itself externally and especially so in an environment of still significant risk aversion as the world operates below its output gap”.
“Reserve managers hold quite short dated positions in US Treasuries given the poor risk reward in a low yielding environment. They may try and find alternatives to the USD but that will only change the premium asked for USD assets, if they do not modify their FX management policies vs USD”.
“The only sizable alternative is the EUR which can only take in so much and the ECB is slowly if steadily factoring in FX in its outlook on inflation, beyond normal econometric forecasting (backward looking and presuming normality)”.
'The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This "faith" is a key reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns.'
Key quotes:
“This is a misunderstanding of global imbalances. The US trades as a triple AAA because the world is financing a higher degree of consumption in the US. The alternative would be to let the USD fall vs the rest of the world, largely wiping out the manufacturing and export industries in emerging markets”.
“As the speed with which this imbalance can adjust is slow, the US finds it easy to finance itself externally and especially so in an environment of still significant risk aversion as the world operates below its output gap”.
“Reserve managers hold quite short dated positions in US Treasuries given the poor risk reward in a low yielding environment. They may try and find alternatives to the USD but that will only change the premium asked for USD assets, if they do not modify their FX management policies vs USD”.
“The only sizable alternative is the EUR which can only take in so much and the ECB is slowly if steadily factoring in FX in its outlook on inflation, beyond normal econometric forecasting (backward looking and presuming normality)”.