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Wall Street quiet after U.S. credit downgrade

August 6, 2011 |  4:01 pm



As bank executives and analysts have met to discuss the significance of Standard & Poor's decision to downgrade the United States' credit rating, no panic buttons are being hit.

Wall Street firms are expecting some investors to make a run for safety when the Asian markets open Sunday night and U.S. markets open Monday morning, but few are predicting catastrophe as a result of S&P's move.

"It’s more kind of psychological than anything else," said a person at one Wall Street firm, who spoke anonymously because of the sensitivity of the financial situation.

As speculation about a downgrade has built over the last month, there has been fear that a downgrade could cause a mass sell-off of Treasuries and trigger clauses in financial contracts that would force selling of other financial assets.

But bank analysts have looked into the nooks and crannies of financial contracts and concluded that a downgrade would have few technical consequences, and that investors are likely to maintain their confidence in the U.S. government's ability to pay back debtors. Indeed, as fear of a downgrade has grown, investors have snapped up Treasuries due to their perceived safety in times of turmoil.  

"We see little forced selling from the main holders," a Citigroup researcher wrote to clients at the end of July. "Accordingly, we see little market impact."

This weekend, Citi released a statement saying, "We continue to closely monitor the situation and will work closely with our clients to ensure their financial services needs are met."

In conversations over the weekend, bankers and analysts concluded that the consequences of the S&P decision are likely to be limited by the fact that neither of the other two major credit ratings agencies have made a similar move. In many financial contracts, the clauses that would be triggered in the case of a downgrade are triggered only if two of the three agencies move to downgrade.

The banks appear to be much less worried now than they were a week ago.

Last weekend, financial firms kept staff on hand and held constant conference calls to prepare for a potential United States default if Congress had not managed to reach a deal on the debt ceiling by last Tuesday.

This week, by contrast, there have been a few conference calls, but employees generally are being allowed to go about their weekend plans.

"In terms of signaling concern about the U.S. economy, sure, this is another important indicator," a bank executive said. "But that’s not something you are going to do anything about before the stock markets open."


S&P downgrades U.S. credit rating

Memories of the stock market crash leave investors on edge

Moody's and Fitch keep U.S. triple-A credit rating, but say outlook is negative

-- Nathaniel Popper

Photo: Standard & Poor's headquarters in the financial district of New York. Credit: AFP/Getty Images