August 8th, 2011
06:27 PM GMT
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U.S. downgrade or European debt crisis? Which is more important? I keep getting asked this question again and again. And it is a good question to ask. Both crises have enormous implications, some more immediate than others.

The U.S.downgrade has a slow burning effect. For instance, U.S.bonds being used to guarantee Israel's debt have been downgraded. Housing loan groups Fannie Mae and Freddie Mac have also been downgraded because they rely on U.S. treasury bonds as their ultimate guarantee.

And certainly the credit rating downgrade changes the rules forever – as PIMCO CEO Mohamed El-Erian said on Saturday, the global financial system is constructed around the U.S. AAA rating being a constant, it is the cornerstone around which everything is built. Even though it may be restored at some time in the future, the fact is that it has gone, the unthinkable has happened.

And we haven’t even begun to consider what this means for China and those other countries with vast U.S.treasury debt.  The downgrade's effects will continue operationally, psychologically and economically for some time to come.

The European debt crisis is much more of a firestorm ready to get out of control at any moment. We saw the speed with which Ireland went from saying "no bailout" to "send money" in a few days.

It could be the same with Italy, which is why the European Central Bank had to move fast over the weekend. For the time being, buying Italian bonds seems to be calming the markets. Don’t be fooled though. It is, at best, treating the symptoms of the crisis, it is not a cure. Watch out for European officials to continue to push for greater integration… if they can.

So, if you are wondering which is the more important, downgrade or euro debt?  The answer is both are serious and ultimately can have effects way beyond the shores where they are based.

soundoff (11 Responses)
  1. Constantine

    the plural of 'crisis' is 'crises' :-)

    August 8, 2011 at 7:41 pm |
  2. joelle ersther benyayer

    some cyber terrorist muslims ansod close to na inzi gorup inside the army in frejus in sainte maxime make touresponsable of the panic in european marekt soem are dutch have alreddy did in holland the muslim in airport in amsterdam have

    August 8, 2011 at 8:13 pm |
  3. aion

    That´s funny and not really elegant. The very worst moment of US economy and they start to talk about Europe and how bad the other countries are. Besides being quite insulting this is a ridiculous way not to recognize America is going down and down with no way back. But they will be always the best,oh yeah.....

    August 8, 2011 at 8:24 pm |
  4. Warren Wolf

    The mere fact that the US prints the greenback and can inflate its debt is not enough to keep the AAA. There has to be strong fundamentals that the US increasingly lacks. Greenspan said the other day that the US can print as many money as it wanted..I am surprised that a guys supposedly highly intelligent says this.. question: what will the value of the USD be then??? Isn't this a bubble of a huge scale???
    When EU countries are downgraded (they deserve it, some of them, do not get me wrong) part of the shenanigan from the US based rating agencies are that they intend to destabilize the euro which seems to threaten the USD monopoly as a reserve currency. But you cannot have a reserve currency that is printed like crazy and loses its value and credibility constantly.. What about the investors, lenders?? will they get what???
    Time to act responsibly with spending. In a world where all are indebted to a very few, question arises, where is the money? This question in itself could lead to collapse..

    August 8, 2011 at 10:19 pm |
  5. Max

    Lets see,
    Our American Car company Chrysler taken over by the Europeans
    Our American Wall Street (NYSE) bought up and taken over by Europeans
    Our American number 1 Beer company already Taken over by Europeans
    Our American Airlines now Buying! the majority of the planes of Europeans
    Our American Tevatron SuperColider surpassed by the>> Europeans
    Our American 747 largest Passenger plane superseded by a European
    Our Dollar currency falling further and further behind the currency of Europeans
    And they say Europe is in a Crisis. So How large exactly is the Crisis that we as America are in. The US supremacy is falling step by step as the years go on. We already lost to Europe, Japan and other nations on Infrastructure, Education and Production. The technology leadership we are quickly loosing is only the next step together with loss of financial dominance. Eventually this will mean loss of military and political status as well. The US is starting to become a Banana republic. Looking on some streets at night with all the hobo`s coming out this is certainly understandable. Our leaders are doing a terrible job. Starting with George Bush Junior some 10 years ago.

    August 8, 2011 at 10:51 pm |
  6. wondering

    Can you imagine the Chinese one day waging war on U.S. soil because of "national interest"???

    August 8, 2011 at 11:28 pm |
  7. Michael

    Talk about false dichotomy. Richard, the European debt crisis was caused by the same people who manufactured the banking meltdown. Financial bankers who care nothing about the consequences of their wealth concentrating machines are the cause of both these issues. Regulate these financial mobsters, as in put most of them in prison, and the problems will begin to work themselves out.

    August 9, 2011 at 2:20 am |
  8. Steve Thompson

    One of the frightening side effects of a major and long-term drop in the world’s equity markets is its impact on our pension plans. As interest rates remain at generational lows, pension plan managers are increasingly desperate to "stay ahead of the curve" and keep the future liabilities of pension plans funded as shown here:

    Both private and public pension plans are, on average, only 80 percent funded on a forward looking basis in the United States. This shortfall must ultimately be covered by taxpayers, adding even further to the debt problem.

    August 9, 2011 at 2:37 am |
  9. kd

    when shall man live without debts?

    August 9, 2011 at 9:15 pm |
  10. Lovely

    Nice first aclirte on the site. I think your first suggest to brace for higher interest rates is something that everyone should be aware of. One day, rates will go higher and there will be massive capital losses when that happens. Welcome aboard Neil.Nick

    February 27, 2012 at 8:55 pm |
  11. icon designs

    I apologise, but, in my opinion, you are not right. I am assrued. Let's discuss it. Write to me in PM, we will communicate.


    September 23, 2012 at 2:16 pm |

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