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325_Supplement18 - Department of Economics University of...

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Intermediate Macroeconomic Analysis Spring 2011 1 Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Supplement 18 Professor Sanjay Chugh Spring 2011 The following analysis, which appeared in the Wall Street Journal on April 19, 2011, discusses the reaction of U.S. stock markets and U.S. bond markets on April 18 following the “negative” credit ratings outlook that Standard & Poor’s (S&P) Corporation had newly assigned to U.S. federal government debt. The discussion is in the historical context of many sovereign governments who had gone into default on their debt, but were fairly quickly able to borrow again from world financial markets. The (even remote) possibility of the U.S. government defaulting on maturing bond payments in the next couple of months if the federal debt ceiling is not raised, coupled with the protracted discussions on Capitol Hill regarding how to dramatically bring down federal government deficits on a sustainable basis, is the shadow that seems to have sparked the S&P downgrade. (S&P is one of the large credit-ratings agencies that provide (ideally) a third-party view of the quality of a vast array of governments’ and corporations’ debts, with “quality” defined to be the probability of maturing bonds being repaid when due and their real purchasing power not being very different from what markets’ expectations were at the time those bonds were issued.)
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