Fund managers spell out US investment risks

As the budget deficit crisis talks in the US remain in deadlock, a number of US financial institutions including BlackRock, Legg Mason and Allianz Global have written an open letter to Barack Obama and Members of Congress urging them to reduce the deficit substantially, rather than simply addressing the debt ceiling.

The letter goes on to say that without a credible action plan to reduce the budget deficit, US debt will likely to downgraded by one or more rating agencies.

"The idea of America losing its AAA rating was once unthinkable, but now highly likely if our leaders fail to act. If that were to happen, six countries, including France and Germany, will have credit ratings above that of the United States, signaling America’s diminished ability to pay its debt. And, make no mistake about it: the consequences of such a downgrade are very real and very serious."

"Interest rates today are low. But a rating downgrade inevitably means higher interest rates - not necessarily immediately but over the course of years to come. As a nation, we are highly dependent on foreign purchases of our debt. With a weakening US outlook, global lenders will demand a higher return for assuming the increased risk – and many investors may simply give up on America and be more likely to seek other places to put their money"

The letter also points out that a rating downgrade will mean a decline in the value of the dollar, intensifying inflation risk going forward.

"The US inflation rate has been much lower than that of other countries because we are a reserve currency for investors worldwide. If we are no longer among the highest rated government borrowers, investors will increasingly seek other currencies to store their wealth. The decline in the value of the dollar will intensify inflation risk in the future, which will further erode our standard of living."

"This fallout will be felt all across America. It will mean fewer and more expensive loans for homes, cars and college expenses as rates rise and credit becomes even harder to secure than it is now. The decline in the value of the dollar will eat into retirement savings. Businesses will find it more expensive to create jobs. Ultimately and most painfully, economic growth for our nation will slow for years to come and diminish the quality of living across America."

Signatories to the letter include BlackRock, The North Carolina Retirement System, Verizon, Allianz Global, Investors-US, Commonwealth Financial Network, Florida State Board of Administration, Jacksonville Police & Fire Pension Fund, Legg Mason Inc., LPL Financial Public, Employees' Retirement System of Mississippi, New Jersey Division of Investment, Raymond James Financial Inc., South Carolina Retirement System, Investment Commission, Teachers Retirement System of Texas.