Dollars and Jens
Friday, August 05, 2011
Sovereign Debt Ratings
From the WSJ:
A cornerstone of the global financial system was shaken Friday when officials at ratings firm Standard & Poor's said U.S. Treasury debt no longer deserved to be considered among the safest investments in the world.Really? Belgium is still AA+? I find that pretty surprising. I wonder how stale that rating is.
S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn't do enough to address the gloomy long-term picture for America's finances. It downgraded U.S. debt to AA+, a score that ranks below Liechtenstein and on par with Belgium and New Zealand.
Wait, what was the headline? Oh, yeah - Belgium isn't the only first-world country with mounting debt and no predictable government.
S&P said "the downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics." It also blamed the weakened "effectiveness, stability, and predictability" of U.S. policy making and political institutions at a time when challenges are mounting.I hear CDSs on US debt have already been going up, and in light of what S&P mentioned, AA or AA+ seems reasonable to me. Which, mind you, is not exactly junk status, or even particularly close, but does acknowledge that the conventional "risk-free" asset is not actually free of risk. It will be interesting to see how (and if) the market reacts to this.
Also, if anyone in Congress or near the top of the executive branch calls for an investigation of S&P and their methods, I'd like to preemptively call for his or her resignation. I know they pull that crap in Italy, but the civilized world doesn't behave that way, and I'd be more concerned about the future of my country if we went down that road than I am concerned about the ratings downgrade or even the issues that precipitated it.