David Kuo: Ratings agency reports rattle markets, but the West is not done yet

Investment Insider

There is a T-shirt on sale in the US. It's emblazoned with a picture of George Bush and has a slogan reading: "You miss me yet? How's that whole hope and change thing working out?"

The answer is that things are not working out well if the analysis by bond ratings agency Standard & Poor's is anything to go by. That said, mutterings by ratings agencies, including Fitch and Moody's, should be taken with a pinch of salt. After all, they hardly covered themselves in glory when they failed to flag up the dangers posed by toxic subprime home loans dressed up as investment-grade bonds.

But ratings agencies can still wreak havoc by just raising an eyebrow. Standard & Poor's did precisely that by voicing concerns that the US government was not addressing its budget deficit, which could reach $1.5trn (90trn) by the end of the year.

Many wonder why it has taken ratings agencies so long to discover that something is awry with America's finances. The US hopes its cocktail of lower taxes and higher spending will help it grow out of the downturn. Admittedly, its economy is growing again – by an anualised 3.1 per cent in the fourth quarter of 2010. But it requires a leap of faith to believe public spending can be brought under control.

Meanwhile, Fitch turned on China's local currency debt. It is worried by a sharp rise in its property values, the emergence of inflationary pressures and the growth in credit, all of which could threaten China's seemingly unshakable financial stability.

World markets lurched lower with these two damning reports. They also drove gold to an all-time high of $1,500 an ounce on fears that a downgrading of US Treasuries could have consequences for countries holding US debt – including China with over $1.1trn, Japan with about $890bn and the UK with around $290bn. However, the markets' rapid recovery suggests investors are sanguine about America's ability to tackle its deficit.

Furthermore, provided the symbiotic relationship holds firm, it is unlikely China will balk at US Treasuries regardless of what ratings agencies decide.

The upshot for investors is that western economies are in decline and eastern ones on the rise – but we knew that. That is not to say that there is a shortage of investing opportunities in the West. Recent results from IBM and Tesco show that companies with the right products and services can grow regardless of how harsh economic conditions get.

David Kuo is director of Fool.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

    Reach Volunteering: Trustees with Finance, Fundraising and IT skills

    Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

    Day In a Page

    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones
    Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

    Why are we addicted to theme parks?

    Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
    Tourism in Iran: The country will soon be opening up again after years of isolation

    Iran is opening up again to tourists

    After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
    10 best PS4 games

    10 best PS4 games

    Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
    Transfer window: Ten things we learnt

    Ten things we learnt from the transfer window

    Record-breaking spending shows FFP restraint no longer applies
    Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

    ‘Can we really just turn away?’

    Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
    Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

    Nine of Syria and Iraq's 10 world heritage sites are in danger...

    ... and not just because of Isis vandalism
    Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

    Girl on a Plane

    An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent