Don’t see S&P downgrading US credit ratings: BNP Paribas

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

Sharada Selvanathan , Currency Strategist, BNP Paribas , does not expect S&P, or Standard & Poor's, to downgrade US credit ratings. "If they do, then that will be significant given the number of central bankers in Asia who are holding US debt. Selvanathan feels the bailout of Freddie Mac, Fannie Mae gives confidence to US assets.

 

Excerpts from CNBC-TV18's exclusive interview with Sharada Selvanathan:

 

Q: The dollar has been rising against the euro. How are you reading the bailout on one hand, and the dismal employment numbers? Would you be a buyer of the US currency or bonds under the current circumstances?

 

A: We have been bullish on the dollar since the beginning of the year. The recent moves in the dollar over the last month or so have been very positive for us. The dollar has been trading lower after news of Freddie Mac and Fannie Mae came in. As soon as the announcement came out, one saw a significant surge in risk sentiment. Equities traded higher, and credit spreads were tighter. Given the fact that the dollar had strengthened over the last few weeks on the back of worsening risk sentiment, today's boost actually saw the dollar reverse some of those gains.

 

One can use the dollar weakness to form long positions on the dollar, because it is extremely positive at least for the US mortgage and housing market. However, it will have a gradual impact.

 

On Friday, PIMCO, or Pacific Investment Management Company's, Bill Gross spoke about a financial tsunami if the US government didn't step in to bailout Freddie Mac and Fannie Mae. So, the government is doing everything it can to provide stability to the financial system. Also, central bankers in Asia are sitting on bonds issued by Freddie Mac and Fannie Mae. This is a very political issue. So, the bailout gives a level of confidence with regard to dollar assets.

 

Q: Are there no doubts on the rating of US bonds, considering the kind of pressure it can bring on the US financial system?

 

A: If an Asian country was in a similar situation, then one would see ratings being downgraded quite sharply. But given that it is the US, we have seen S&P reaffirming its AAA ratings last week. Over the weekend, the rating agency said they rate Freddie Mac and Fannie at AAA. I don't know whether it is political or not, but at least there doesn't seem to be any signs that they would downgrade US credit ratings. If they do, then that will be significant, given the number of central bankers who are holding US debt.

 

I don't expect a move to downgrade ratings. We would not see a downgrade at this stage because the consequences for global financial markets would be significant. So, there won't be any changes on that front.

 

Q: USD 200 billion is a significant amount. Is this the last in terms of bailout ammunition that the US government would have?

 

A: The US government said they will put in as much money as required. Right now, they said they aren't going to put the initial money upfront, but would do it on a need-by-need basis. However, both these institutions are insolvent given the fact that they are mortgage companies and given that the US housing market is in such trouble. If one looks at figures of the US housing market, there are really no significant signs of improvement, turnaround, or bottoming out taking place. We are going to see many quarters of losses from these institutions, and the government has to be ready to provide money when required.