US government debt is a cornerstone of the world's financial system, is held in large amounts by foreign creditors such as China and Japan and is used as collateral on a daily basis by banks and investors. While the move has been anticipated by markets since last week's deal in Washington agreed a cut of only $2.5trillion in the deficit, it's unclear how markets will react when they open on Monday. America's debt is still rated AAA by Moody's and Fitch, the two other largest agencies. Analysts at Capital Economics said the move will "surely rock the financial markets when they open on Monday" but added that any moves are likely to be short-lived because the slowing global economy makes US government debt, or Treasuries, an attractive place for investors to park money. At roughly $9trillion in size, the Treasury market has advantages and liquidity that rival government bond markets, including Britain's, cannot match. Despite the threat of the downgrade, the prices for Treasuries are close to their highs for the year as investors seek safe-havens and expectations for economic growth diminish. Whatever the reaction next week, investors are clearer that the downgrade is a severe blow to America's prestige and is also likely to increase the US government's borrowing costs. JPMorgan this month estimated that such a move could add about $100bn a year to America's funding costs as lenders demand more to compensate for the greater risk. The US spent $414bn last year on interest payments. "I have a feeling the dust may settle quite quickly," said David Buik of BGC Partners in London. "The US Treasury market is the most liquid in the world." Either way, it frays nerves further before what was already going to be tense opening of financial markets next week. 
Access Investments-Building Awareness - European Union-ROMANIA
Saturday, August 6, 2011
US government debt is a cornerstone of the world's financial system, is held in large amounts by foreign creditors such as China and Japan and is used as collateral on a daily basis by banks and investors. While the move has been anticipated by markets since last week's deal in Washington agreed a cut of only $2.5trillion in the deficit, it's unclear how markets will react when they open on Monday. America's debt is still rated AAA by Moody's and Fitch, the two other largest agencies. Analysts at Capital Economics said the move will "surely rock the financial markets when they open on Monday" but added that any moves are likely to be short-lived because the slowing global economy makes US government debt, or Treasuries, an attractive place for investors to park money. At roughly $9trillion in size, the Treasury market has advantages and liquidity that rival government bond markets, including Britain's, cannot match. Despite the threat of the downgrade, the prices for Treasuries are close to their highs for the year as investors seek safe-havens and expectations for economic growth diminish. Whatever the reaction next week, investors are clearer that the downgrade is a severe blow to America's prestige and is also likely to increase the US government's borrowing costs. JPMorgan this month estimated that such a move could add about $100bn a year to America's funding costs as lenders demand more to compensate for the greater risk. The US spent $414bn last year on interest payments. "I have a feeling the dust may settle quite quickly," said David Buik of BGC Partners in London. "The US Treasury market is the most liquid in the world." Either way, it frays nerves further before what was already going to be tense opening of financial markets next week. 
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Tools Europe can use to stanch its crisis
European Financial Stability Facility: The current euro-zone bailout fund. Euro-zone leaders have agreed to expand its capacity to €440 billion and allow it more flexibility, but the changes await ratification
European Financial Stabilization Mechanism: A €60 billion fund guaranteed by the European Commission, using the budget contributions of all 27 EU member states as collateral. Like the EFSF, it raises funds from the financial markets by issuing bonds. There has been no discussion of expanding it.
European Stability Mechanism: A €500 billion fund envisaged as the permanent rescue vehicle for the euro zone, replacing the EFSF in mid-2013.
Securities Market Program: An open-ended program under which the ECB buys the government bonds of troubled euro-zone member states in the secondary market. WSJ research
The euro zone is different. The European Central Bank is prevented by treaty restrictions from lending to governments and has been a reluctant buyer of government bonds in the secondary market. Willem Buiter, chief economist at Citigroup, argues that this creates a "black hole" at the center of the euro zone that constitutes "a fundamental design flaw" of the currency union.
Euro-zone governments have tried to patch over this flaw by setting up bailout funds. Over the past 18 months, they have rescued Greece, Ireland and Portugal after they were shut out of financial markets.
But these steps haven't been enough to stop the much bigger economies of Spain and Italy from drifting into the debt vortex. One reason for this, according to analysts, is that the bailout funds haven't been big enough or flexible enough to handle large liquidity crises.
Euro-zone leaders made big strides boosting the tools available to the main rescue vehicle, known as the European Financial Stability Facility, at a summit July 21, which also set new aid for Greece.
The leaders agreed to almost double the fund's lending capacity to €440 billion ($620 billion). They boosted its flexibility, agreeing the fund should be able to buy government debt on the secondary market. Such purchases could support bond prices and prevent yields, which move inversely to prices, from rising to unaffordable levels for governments.
Answers: yes, and yes. USA TODAY columnists John Waggoner and Sandra Block attempt to make some sense of the market's gyrations, and what you should be doing about them.
How bad is the damage?
Any loss is a big loss when it's your money. But unless you're entirely invested in stocks, your losses probably haven't been as big as you think. True, the average stock fund has fallen 12.5% since the stock market's most recent high on April 29. But funds that invest in U.S. Treasury securities are up 6.1%.
Relatively few people started investing on April 29. The past 12 months, the average stock fund has gained 9.2%, including last week's losses. And, while stock funds have eked out a 7.3% gain the past five years, U.S. government funds have jumped 36.9%.
Should I move into bonds?
"You have bonds for stability and diversification," says Kathy Jones, fixed income specialist at discount brokerage Charles Schwab. "When stocks go down, bonds do well — it's the sleep-at-night position you have in your life."
Moving all your money into bonds now probably won't get you clobbered, but you won't make a lot of money, either. The two-year Treasury note yields just 0.28%. "That's saying, 'Take my money for two years, just promise me I'll get it all back,'" says Dean Popplewell, chief currency strategist with OANDA, a currency-trading firm.
If you must look at bonds, Jones says, consider high-quality corporate bonds. Corporate balance sheets are in good shape, and you'll get somewhat higher interest than you would a Treasury security. And avoid bonds issued by banks; many are still struggling.
USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, slowly gaining strength in the second half of the year. Lower oil prices, improved auto production and sales, increased business equipment spending, strong exports and recovery in the multi-family residential sector are expected to push growth above 3% in November and December. High unemployment and continued weakness in the single-family housing sector remain drags on growth.
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