S&P Downgrades US Debt

To top off the worst week in recent memory, the ratings agency Standard & Poor's downgraded the long term United States debt from triple A to AA+. While most US based banks and institutions that hold these bonds have recently renegotiated self-imposed restrictions against holding lower than perfect rated debt in their vaults, the effects this downgrade will have on international institutions is has yet to be determined. But one question remains: why did S&P downgrade T-Bonds, even after the debt ceiling deal?

For weeks now, S&P has been threatening to downgrade US debt if the government did not improve its ability to meet payments. The agency said it would spare the US if the debt ceiling deal included at least $4 trillion in cuts over the next decade. According to the bipartisan Congressional Budget Office, the deal cut less that $2 trillion. Despite a $2 trillion dollar mathematical error that postponed S&P's downgrade announcement Friday, the agency stuck to its guns. Politically, this controversial move was necessary if only to show the public that the agency would make good on its threats. This is especially important when reminded of the role the ratings agencies played leading up to the financial crisis; many highly questionable mortgage backed securities were stamped triple A with little or no due diligence performed.

Despite S&P's claims that politics in Washington threaten the ability of the government to pay its bills, and the historical contextual importance of proving the agency is both comptent and willing to judge financial instruments faithfully, one question remains: what about Fitch and Moody's? How can two of the "big three" ratings agencies believe the US to be triple A worthy and not the third? Judging by their ratings of other nations' debt instruments, it is not accurate to say that S&P is consistently more critical, while the other two are consistently more generous. By and large, the only reasonable explanation I can come up with to account for the lack of consensus amongst the agencies regarding our credit worthiness is the high degree of subjectivity that comes with rating debt. The actual difference between a bond rated triple A and AA+ would be difficult to quantify. Although I cannot prove this theory, it is possible that the complex bureaucratic web that makes up an agency (and the nuanced differences between the makeups of the three agencies) permit different conclusions between them, even if their mathematical models were identical (and we must assume they are not). It will be interesting, if nothing else, to see how the international markets react to this news. All we can do is wait and see.

Debt Ceiling: Is the US Government Still Threatened by a Downgrade?

In an article on thestreet.com, Robert Holmes tells the story of Jeffrey Sica, a money manager, and his politically unpopular view that Standard and Poor, the ratings agency, should make good on its threat to downgrade US paper, despite the debt ceiling deal reached today. This move would be nothing short of necessary for the ratings agency to retain its credibility, especially after a dismal track record of rating dangerous securities triple-A during the pre-recession MBS bubble. This statement resonantes with many Americans still frustrated with the trajectory of federal spending, many noting that no individual or corporation could possibly maintain access to cheap capital with anything close to the spending/revenue ratio we are currently seeing. While S&P has not yet issued a statement regarding this latest debt deal, the markets have reflected the continuing uncertainty felt by many regarding the recent revisions of the first quarter's GDP, and well as recalculations of inflation and manufacturing outputs. Treasury rates are also up, indicating bond investors are not yet willing to embrace "mission accomplished" on the debt problems plaguing the government. Could we be witnessing the decline of modern Keynesian Economics?