The world’s most influential fixed interest fund manager, Pimco, says the US rating downgrade by Standard & Poor's can be absorbed by the market.
It also said today Australia is in a unique and powerful position as the US and Europe remain under pressure.
Australia’s China connection is fuelling economic growth in Australia that bears comparison with emerging economies, it said. It is also a highly stable, advanced economy that has ample scope to cut interest rates and provide liquidity support for banks if necessary.
Pimco was a big seller of US government debt ahead of the S&P decision on concerns about the debt load and the probability of a ratings downgrade. But there is no need for wholesale panic in the wake of the ratings downgrade, because the US government bond market "is still the deepest and most liquid in the world," it said, adding in a note to clients that the ratings cut ‘‘does not alter the US obligation to pay or seriously change default expectations.’’
The US dollar would ‘‘still be the reserve currency and the safe asset due to the lack of an alternative’’, Pimco added.
Most pooled fund investment guidelines and mandates were also flexible, Pimco said, and the US Federal Reserve had already issued a guide to US banks saying that the downgrade did not change the weighting it gives US debt when it calculates bank capital requirements.
As a result, ‘‘the US banking system should not be forced to sell (US bonds)’’ Pimco said.
And while it acknowledged that the long-term impact of the credit rating downgrade for US debt is difficult to forecast - it said all investable assets would be reconsidered in light of the ratings change - Pimco also said that it was possible that it would be positive for the markets, by forcing Washington’s lawmakers to mount a more serious attack on America’s debt overhang.
US lawmakers are able to fix America’s fiscal problem any time by cutting Medicare and pension entitlements or raising taxes,’’ Pimco said, but lawmakers ‘‘will wait until forced.’’
mmaiden@theage.com.au