Triple-A Rated Debt Threat: Potential Winners

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Which sovereigns are the potential winners of the U.S. debt crisis?

While the conversation about the debt ceiling has turned into a political sound bite fight, one potential fall-out is the loss of America’s triple-A rating. Rued by many as a tarnished symbol of conflicted ratings agencies, it is still the standard by which many funds managers validate their investment decisions.

If the United States loses that rating, will investment dollars head for the nearest exit? And will the bonds of the remaining triple-A rated countries benefit by an influx of dollars, pushing bond prices higher and rates lower?

Including the United States, seventeen sovereigns currently hold a triple-A rating from Moody’s Investors Service, nineteen sovereigns hold that rating at Standard & Poor's or about 15 percent of all sovereigns rated at the respective agencies.

“Real money accounts may not have the capacity to hold as much former “risk free” U.S. Treasury assets,” writes David Gilmore, Foreign Exchange Analytics Partner. “Reserve managers may be under greater pressure to diversify into remaining AAA rated sovereign debt markets (and currencies) pressuring the dollar and driving U.S. rates up—again de facto tightening.”

In alphabetical order, both Moody’s and Standard & Poor’s list the following sovereigns as triple-A:

Australia
Austria
Canada
Denmark
Finland
France
Germany
Isle of Man
Luxembourg
Netherlands
Norway
Singapore
Sweden
Switzerland
United Kingdom
United States of America

Standard & Poor’s rates three additional sovereigns AAA:

Guernsey
Hong Kong
Liechtenstein

Moody's rates one additional sovereign Aaa:

New Zealand

While it might surprise investors to note that Guernsey could soon be considered a safer place to park your assets than the United States, politics is not confined to our government.

“Rating agencies live in a very different world—struggling for survival and the only value they have is their credibility,” says Mr. Gilmore. “Not downgrading the U.S. rating from AAA will be a failing grade for many buy and sell side market participants and hence I think the rating agencies will err on the side of rating downgrades for all sovereigns ahead, including the USA.”

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