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BBH: U.S. 'stands a decent chance' of ratings downgrade

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The U.S. may be at risk of a downgrade to its debt ratings, although this may have a limited impact on financial markets based on what happened in 2011,  said Brown Brothers Harriman. As the government keeps running up debt by launching fiscal stimulus, “the case for downgrades just keep getting stronger, but the timing is unclear,” BBH said. S&P affirmed its AA+ rating with stable outlook in early April, while Fitch affirmed its AAA rating with stable outlook in late March, BBH said. “Our own sovereign rating model says otherwise,” BBH said. “In the most recent update for Q2, the implied rating for the U.S. fell sharply into AA- territory. It had been going back and forth between AAA and AA+ for several quarters, but this crisis has pushed the implied rating down even further. This means that the U.S. stands a decent chance of losing its Aaa and AAA ratings from Moody’s and Fitch. S&P already took its AAA rating away back in August 2011.” BBH said its analysis assumes that the ratings agencies have not changed their methodologies. “Our own model was constructed on the long-standing metrics that help determine a country’s creditworthiness,” BBH said. “With most countries blowing out their budget deficits and many engaging in quantitative easing, many lines have blurred.” Analysts assessed the potential market impact based on what happened in 2011 after the S&P downgrade. “Bottom line: we suspect an eventual loss of Aaa and AAA from both Moody’s and Fitch would likewise have limited market impact,” BBH said. “Equities appear most at risk, followed by the dollar and U.S. Treasuries. That said, a sample size of one is not much for investors to go on.”

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