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And then there were five. Long the bluest of blue chips, General Electric is no longer part of an elite group of a half-dozen triple A rated American corporations after a one-notch downgrade by Standard & Poor’s. But, in the same way it is possible to damn with faint praise, Thursday’s cut in effect did the opposite – praising by faint damnation. GE shares rallied more than 10 per cent in early trading as rumours of multiple notches or a negative outlook proved false.

The downgrade is further confirmation of financial markets’ dysfunctional relationship with ratings agencies. After years of accepting repackaged junk as top-shelf goods just because S&P or Moody’s said so, the crisis has pushed investors to the opposite extreme of treating any financial firm as guilty until proved innocent. That is how GE’s debt has been quite irrationally treated, so Thursday’s sigh of relief may be a sign the agencies are regaining their credibility.

Of course, credit ratings are no moot point for GE, which based much of its success on GE Capital’s strength. A four-notch downgrade would have had nasty consequences, but the stable outlook means more cuts by S&P are unlikely for now. GE appears far better positioned than most purely financial firms to ride out the financial storm through capital raising and cash preservation actions. It also retains useful room for manoeuvre. Further steps could be more cuts to GE Capital’s dividend to the parent or restricting new business.

GE’s shares are up 60 per cent from the recent panic lows, but still down three-quarters since the end of the Jack Welch era in 2001. Further recovery is likely, as is a reassessment of the hybrid financial-industrial model inherited from Mr Welch. Once the external downgrades are done, expect an internal downgrading of GE Capital’s relative importance. That is the path back to unquestioned blue-chip status.

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