Daily briefing: Friday - The ripple effect from across the pond

Back in the boom period of the mid-to-late noughties, if you had told an insurance chief exec that the USA would be on the verge of a debt downgrade within five years, they might have called for the men in white coats.

Buying US treasuries is the foundation of the world’s financial system, bought across the world as a safe bet - a bit like stuffing cash under your mattress.

The prospect of a downgrade, let alone a default, is unchartered territory. Let’s ignore a technical default, because it still remains so unlikely, and instead concentrate on the distinct possibility of a debt downgrade.

Predicting the unimaginable

One scenario of a downgrade, from triple AAA to AA, is that some insurers would have to find ways to strengthen their balance sheets as the value of their US bonds declined. Insurers in turn could face being downgraded.

It could also lead to more insurers seeking other low-risk bonds, such as UK gilts or German bunds.

In a worst-case scenario, it could lead to mayhem in the financial markets akin to a repeat of the 2008 financial crisis.

No one really knows what the outcomes might be. Lloyd’s chairman Lord Levene says today: “Nobody, I think, has factored in what will happen if US government debt, which has been regarded as a very safe haven, wasn’t that safe anymore.”

What all this does show is the amazing power of the rating agencies, which can potentially change the course of history at the stroke of one decision.

Having so badly misjudged toxic debt in the run-up to the financial crisis, they feel a ‘get tough’ approach is the way to rebuild their reputation.

And they’re doing it at a time when the Western world, but not the dependable insurance industry, is awash with debt accrued over the last 20 years. Who knows where this will all end?

Who's stalking whom?

JLT chief executive Dominic Burke rubbishes the idea of an Aon takeover, speaking at the half-year results. You can understand his point.

The problem is that many see Aon as this larger predator about to jump on JLT with an acquisitive bid. However, JLT is part of Jardine Matheson Holdings, which has revenues four times the size of Aon's, at $47bn. So why would Jardine sell its broking subsidiary, especially when it has the firepower to expand JLT and open it up further to Far East markets?

In fact, it’s Aon that should be watching out for JLT, which is expanding all the time. Certainly in the UK, the big three of Marsh, Aon and Willis is now the big four.