2011 Nightmare Repeated?…Securities Industry Struggles to Mitigate Impact of US Credit Rating Downgrade

In 2011, Complex Factors Including Weakened Economic Momentum and Spreading Fiscal Crisis
Only Anticipated Adverse Effects... Potential for US Economic Recovery and Increased Korean Exports

As the United States' sovereign credit rating was downgraded for the first time in 12 years, the domestic securities industry became highly alert. This was because, during a similar incident in 2011, the KOSPI plunged by around 20% in a short period, causing a significant shock to the stock market. Although the securities industry emphasized that this downgrade was a foreseen event and its impact would be limited, the KOSPI still dropped nearly 2% in a single day.

According to the Korea Exchange, on the 2nd, the KOSPI closed at 2,616.47, down 1.90% from the previous trading day. It fell by 50.60 points in just one day. This was the largest daily drop in about four and a half months since March 14 (-61.63 points). The KOSDAQ index also closed at 909.76, down 3.18%.

The domestic stock market indicators showed a simultaneous decline because, in the early hours of the day (Korean time), Fitch, one of the three major international credit rating agencies, downgraded the United States' credit rating from the highest 'AAA' to 'AA+'. The main reasons were the deterioration of the U.S. fiscal situation and the national debt burden. In particular, Fitch pointed out that the U.S. political sphere repeatedly pushes the government to the brink of default over fiscal issues every year before reaching a last-minute compromise, indicating weak trust in fiscal management. This is the first time in 12 years since Standard & Poor's (S&P) downgraded the U.S. sovereign credit rating in 2011, and this is the second time in history that one of the three major credit rating agencies has downgraded the U.S. sovereign credit rating.

When S&P downgraded the U.S. sovereign credit rating from 'AAA' to 'AA+' in August 2011, the KOSPI experienced a sharp decline in a short period. The KOSPI closed at 2,172.31 on August 1, but after the downgrade announcement, it fell to an intraday low of 1,684.68 on the 9th. In just eight days, the KOSPI dropped about 22%. Afterward, the KOSPI remained in a trading range without significant rebound momentum and only recovered to the 2,000 level in June 2014, about three years later.

The financial investment industry quickly responded on the day, recalling the 'nightmare' from 12 years ago. There was concern that market anxiety could increase due to this incident, shaking the stock market. One of the main reasons the securities industry believes the impact of the U.S.'s second-ever credit rating downgrade will be limited is that it is a previously experienced issue, so there is a learning effect. Park Hee-chan, a researcher at Mirae Asset Securities, explained, "(After the 2011 S&P downgrade) the financial market showed somewhat high volatility and a stock price correction phase unfolded, but it did not take long to overcome it," adding, "It was an event we had already experienced once." He continued, "At that time, there were concerns about the Greek crisis, leading to first and second bailout packages, and worries spread across the PIGS (Portugal, Italy, Greece, Spain) countries, creating fears of the Eurozone's collapse. Now, we are obviously far from such a situation."

The Meritz Securities investment strategy team also released an urgent review report on the day, emphasizing that the situation now is significantly different from that in 2011. Lee Seung-hoon, a researcher at Meritz Securities, said, "The severe financial market shock at that time was due to a combination of factors, including the physical downgrade of the credit rating, weakening economic momentum, and the spread of the fiscal crisis," adding, "Considering that the leading indicators by country used for economic forecasts have rebounded, the possibility of Korean export improvement supported by a recovery in the semiconductor industry, and that advanced countries' fiscal policy focus is on controlling the speed of national debt, the likelihood of a shock similar to that time is limited from a macro perspective."

It is also worth noting that Fitch had already hinted at the possibility of a downgrade for the U.S. when it announced its credit rating outlook in May. Kim Hwan, a researcher at NH Investment & Securities, said, "The U.S. economic recovery is expected to remain stable, supported by steady employment indicators, and a turnaround in earnings is anticipated from the second quarter this year based on the S&P 500," adding, "The financial market impact of Fitch's credit rating downgrade will be limited, and we maintain a positive view on the U.S. stock market due to expectations of stable fundamental improvements in the U.S."

This content was produced with the assistance of AI translation services.