Opinions of US Treasury getting downgraded
Buffett Says Cutting U.S. Rating Was Mistake, Sees No Recession
By Betty Liu and Andrew Frye – Aug 7, 2011 7:56 AM GMT+0800
Chairman And Chief Executive Officer Of Berkshire Hathaway Inc., Warren Buffett. Photographer: Scott Eells/Bloomberg
Billionaire Warren Buffett said Standard & Poor’s erred when it lowered the U.S. credit rating and reiterated his view that the economy will avoid its second recession in three years.
The U.S., which was cut Aug. 5 to AA+ from AAA at S&P, merits a “quadruple A” rating, Buffett, 80, said yesterday in an interview with Betty Liu at Bloomberg Television. The downgrade followed the biggest weekly selloff in U.S. stocks in 32 months, with the S&P 500 slumping 7.2 percent to its lowest level since November.
“Financial markets create their own dynamics, but I don’t think we’re facing a double dip recession,” said Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A) “Clearly what stock markets do have is an effect on confidence, and this selloff can create a lack of confidence.”Stocks plunged last week amid signs the U.S. economy is slowing and speculation that Europe will fail to contain its sovereign-debt crisis. Reports on manufacturing and consumer spending trailed economists’ forecasts. Euro-region central bank governors are planning emergency talks aimed at limiting the market fallout from the first U.S. rating downgrade in history.
The U.S. cut, announced after the close of trading in New York, was prompted by rising public debt and “greater policymaking uncertainty,” S&P said in a statement. The U.S. has the top credit rating at both Moody’s Investors Service and Fitch Ratings. Buffett said he doesn’t rely on the views of ratings firms when buying and selling securities. Berkshire is the biggest shareholder of Moody’s Corp.
Rising Earnings
Berkshire posted a $3.42 billion second-quarter profit, up 74 percent from a year earlier, the company said Aug. 5. Returns from derivatives improved, and Buffett’s 2008 investment in Goldman Sachs Group Inc. led to an after-tax gain of about $806 million. Buffett is seeking investments and acquisitions as Berkshire’s cash climbed to $47.9 billion at the end of June.
The S&P downgrade won’t have an impact on investment decisions in money funds and bond funds at Western Asset Management, said Pasadena, California-based Chief Investment Officer Stephen Walsh. Western Asset, the bond unit of Legg Mason Inc., manages about $365 billion in assets and has an “underweight” position in U.S. Treasuries.
“Our money funds are required to invest in securities with the full faith and credit of the U.S. government, but it doesn’t speak to a rating,” Walsh said. “Our conversations with central banks and foreign investors show that they won’t view Treasuries differently.”
Mohamed El-Erian, the chief executive officer of Newport Beach, California-based Pacific Investment Management Co., said that the downgrade will spur uncertainty in the market.
“It will fuel uncertainties about the functioning over time of the world economy as there are no other pure AAA’s able and willing to materially complement or replace the role of the U.S. at the core of the global financial system,” El-Erian wrote in an e-mailed response to questions.
To contact the reporters on this story: Betty Liu in New York at bliu17@bloomberg.net; Andrew Frye in New York at afrye@bloomberg.net
About what will happen here in Hong Kong:
Source: http://www.marketwatch.com/story/hong-kong-braces-for-us-downgrade-fallout-2011-08-07
Hong Kong braces for U.S. downgrade fallout
While global equity markets face a fraught opening in mere hours, Hong Kong looks particularly exposed, tied both to China — the largest holder of U.S. Treasurys — and to the downgraded U.S. dollar through its exchange-rate peg.
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China’s official news agency, Xinhua, is certainly not downplaying America’s diminished credit standing. “China, the largest creditor of the world’s sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets,” Xinhua said. China also urged the United States to apply “common sense” to “cure its addiction to debts” by cutting military and social-welfare expenditure.
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Last week the heads of both HSBC and Bank of East Asia said Hong Kong could consider pegging to a basket of currencies. The core problem is recognized: that following U.S. monetary policy is increasingly inappropriate as inflationary pressures escalate in Hong Kong. For instance, if the Federal Reserve decides to adopt further quantitative easing, it will make inflationary pressures here even more uncomfortable.
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Locally, it increasingly appears the penny has dropped that continuing with the 28-year-old currency peg is ultimately a political issue that produces some clear winners and losers. While at the grass roots — the higher cost of living, from food to rents — dwindling purchasing power of the currency makes the peg painful for many, it also benefits numerous business interests. Property developers to companies seeking listings or cheap funding in a depreciating currency all are happy with the massive inflows of liquidity the peg currently contributes to. It comes as little surprise then that billionaire tycoon Li ka-shing, who owns the largest property developer in town, last week suggested that a change to the peg could be dangerous.
Still, while S&P has changed its opinion on the U.S.’s creditworthiness, the Hong Kong government shows few signs of a rethink. Last week, Finance Minister John Tsang repeated that there were no plans or intention to change the peg.
Chloe Sha 