Quote:
Originally Posted by Cowboy89
An agreement is not necessarily going to avoid a downgrade from AAA- to AA+ from S&P. S&P has maintained that $4 Trillion over 10 years needs to be cut/raised through taxation in this agreement to stave off a downgrade. Looking at the Senate bill from Reed and the Republican house bill from Boehner it seems to be short 1-1.3 trillion in the cuts/added revenue department, meaning a compromise deal still equals downgrade and negative implications.
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And further to this, treasuries are often used as collateral for margin accounts, swap markets and other short-term funding. This changes if the USA downgrades to AA. Anyone at the edges of a levered position would be forced to post more collateral or sell assets to meet margin requirements.
Many money market funds are often predicated on AAA-rated securities being used in the transaction (by contract or by prospectus). This action could lead to a freezing of short-term funding markets, same problem we had in 2008.
Life insurance companies own a ton of long government paper because it's AAA-rated. Not clear to me that this is a non-event, more likely the elephant in the room.