US debt downgrade: first market reactions

The S&P downgrade of the US debt has been blamed so far on plunges in Israeli and Middle Eastern markets.

Saudi stocks dropped 5.5% while Israeli stock market plunged 7% on Sunday and the blame is squared on the debt downgrade.

Following the market plunge, Israel’s chief banking regulator said that capital that banks hold is inadequate, meaning banks may have to sell some assets (Treasuries?) or issue more shares. This measure could also be interpreted as a signal that Israelis are expecting a global banking contagion.

“We expect banks will raise their Tier 1 capital,” David Zaken, the Bank of Israel’s Supervisor of Banks, said.

Raising capital on a bank is similar to raising a margin requirement on a stock trader – it is contractionary for the market.

In Europe, media is abuzz with doomsday headlines and some can be read here.

Meanwhile, traders and financiers are issuing confusing predictions (some can be read here) but all of them are negative.

We have already listed some things that could occur following the debt downgrade and is available here: 10 things that could happen after US debt downgrade.