US credit rating at risk

The current "flight to safety" - investors taking their money out of stocks and other investments and putting the money in US Treasury securities (including Savings Bonds) - assumes that US Treasury securities, with their AAA rating, are the safest of all investments.

However, according to US credit rating under threat in yesterday's Financial Times, Standard & Poor's has warned that steps taken to control the current financial crisis could lower that rating.

In the event of a deep and prolonged US recession, S&P said the potential costs of propping up government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, which have implicit government backing, could cost the US government up to 10 per cent of GDP.

The costs of supporting broker-dealers like Bear Stearns in a dire economic situation would be much lower, at below 3 per cent of GDP, S&P said.

“The size of GSEs, coupled with their current level of common equity, could create a material fiscal burden to the government that would lead to downward pressure on its rating,” the S&P report said.