Global reactions to US debt downgrade

Here is what some leading fund managers across the world had to say about the S&P downgrade for long-term US debt.

Value investor and leading emerging markets asset manager for the Templeton group, Dr Mark Mobius, said in his blog:

“Standard & Poor’s potential downgrade of US debt had been signalled for a few weeks, so it did not come as a complete surprise. In fact, some smaller rating agencies had already downgraded the US. Nonetheless, the initial market reaction will likely be a high degree of uncertainty and volatility, since investors will likely not know where to turn for assets with lower short-term volatility. During the sub-prime crisis, investors largely sought such assets in US Dollars and Treasuries. While during the sub-prime crisis the US dollar index was high, now it is low reflecting a changed perception of markets that may be considered less volatile in the short-term. In particular, we believe currencies and stocks of emerging countries may look relatively attractive given: (1) emerging markets generally have more foreign reserves than developed countries and (2) the debt-to-GDP levels of emerging countries tend to be lower than developed countries. This improved the ability to manage their currencies and historically better ability to service debt is why we believe emerging market currencies have been so strong — and may continue to be.’’

Mohamed El Erian, CEO of PIMCO, wrote in Financial Times : “With America occupying the core of the world’s financial system, Friday’s downgrade will erode over time the standing of the global public goods it supplies — from the dollar as the world’s reserve currency to its financial markets as the best place for other countries to outsource their hard-earned savings. This will weaken the effectiveness of the US as the global anchor, accelerating the unsteady migration to a multi polar system while increasing the risk of economic fragmentation.’’

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