The top news story since Friday afternoon has been the decision by S&P to downgrade the credit rating of the United States of America. This is the first time that there has ever been any question about our ability and willingness to pay our debt. So far only one rating agency has issued a downgrade, although we also appear to be on the watch lists of Fitch and Moodys. The U.S. Treasury reacted by challenging the numbers used by S&P in analyzing the financial strength of the U.S. economy.
Rating agencies play an important role in stock and bond markets. By having a standard gauge for the financial strength of entities issuing debt or equity instruments, investors are able to compare investment opportunities both for risk and return on investment. This score card has become imbedded into investment policies of both individual and institutional investors. When I was a banker, our investment policy was to invest only in AAA rated bonds or U.S.Treasuries. Treasuries were the gold standard. They were perceived as the safest investment that any bank could make.
What S&P has done is put a crack in the confidence of investors. Looking at the world economy, U.S. Treasuries may still be the safest investment, but the perception of risk just went up. The worries over risk are somewhat mitigated by the fact that Moodys and Fitch did not follow S&P with downgrades of their own. That fact alone, could prevent huge sell-offs by institutional investors with AAA investment policies (governments, banks and pension plans).
Since the rating downgrade was announced after markets closed on Friday, we do not yet know how large this crack is. The thing to watch on Monday is whether investors bail out of U.S. Treasuries. So far we know that Middle East markets tumbled on Sunday, that the Group of 20 have conferenced about how to “minimize market shocks,” and that the G7 deputy finance ministers have agreed to an urgent conference call before Asian markets open tomorrow.
One of the concerns of S&P was the unwillingness of Republicans to consider any revenue increases in order to pay down debt. “Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.”
Yet the response from Republicans has, predictably, been to blame the Democrats for spending, ignoring the spending on two wars and an unfunded prescription drug benefit in Medicare. Despite being specifically singled out in the S&P downgrade as refusing to look at both sides of the debt formula (spending and revenues) Republicans are still playing the ostrich blame game. It is time to get real. Republicans are not part of the solution, they are the problem.
Homework:
S&P Downgrade Report
US Treasury Reacts
The World Reacts
Moodys
Fitch
Group of 20
G7
Rating agencies play an important role in stock and bond markets. By having a standard gauge for the financial strength of entities issuing debt or equity instruments, investors are able to compare investment opportunities both for risk and return on investment. This score card has become imbedded into investment policies of both individual and institutional investors. When I was a banker, our investment policy was to invest only in AAA rated bonds or U.S.Treasuries. Treasuries were the gold standard. They were perceived as the safest investment that any bank could make.
What S&P has done is put a crack in the confidence of investors. Looking at the world economy, U.S. Treasuries may still be the safest investment, but the perception of risk just went up. The worries over risk are somewhat mitigated by the fact that Moodys and Fitch did not follow S&P with downgrades of their own. That fact alone, could prevent huge sell-offs by institutional investors with AAA investment policies (governments, banks and pension plans).
Since the rating downgrade was announced after markets closed on Friday, we do not yet know how large this crack is. The thing to watch on Monday is whether investors bail out of U.S. Treasuries. So far we know that Middle East markets tumbled on Sunday, that the Group of 20 have conferenced about how to “minimize market shocks,” and that the G7 deputy finance ministers have agreed to an urgent conference call before Asian markets open tomorrow.
One of the concerns of S&P was the unwillingness of Republicans to consider any revenue increases in order to pay down debt. “Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.”
Yet the response from Republicans has, predictably, been to blame the Democrats for spending, ignoring the spending on two wars and an unfunded prescription drug benefit in Medicare. Despite being specifically singled out in the S&P downgrade as refusing to look at both sides of the debt formula (spending and revenues) Republicans are still playing the ostrich blame game. It is time to get real. Republicans are not part of the solution, they are the problem.
Homework:
S&P Downgrade Report
US Treasury Reacts
The World Reacts
Moodys
Fitch
Group of 20
G7
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