♠ Posted by Emmanuel in Cheneynomics at 4/18/2011 05:21:00 PMSometimes I'm so glad to be mistaken. I've often thought that the political economy of credit rating agencies went like this: The likes of Standard and Poor's, Moody's, and Fitch's would never downgrade American sovereign debt since the US government held the ultimate ace. That is, it could remove their status as Nationally Recognized Statistical Rating Organizations (NRSROs) if they did not play along. Just as these credit rating agencies happily slapped "AAA" ratings on all sorts of subprime securities which turned out to be utter rubbish, they've been more than willing to grant the US government the highest credit rating of them all. I've always attributed it out of fear of being cast out of the world's biggest capital market by losing their designation as NRSROs. Certainly, an entity that is for all intents and purposes bankrupt and is intent on staying the course deserves Grecian doubt.
But wonder or wonders, S&P has now downgraded the outlook on American sovereign debt to negative. Which, of course, is the prelude to a full-blown credit downgrade. As you'll read below, there is now a one-in-three chance of this happening in the next two years. While I write, the DJIA is down 200+ points as a knee-jerk reaction (to the inevitable?) Just when I was set to enjoy a peaceful Holy Week, these folks butt in. From the ever-reliable Bloomberg:
Standard & Poor’s put a “negative” outlook on the AAA credit rating of the U.S., citing a “material risk” the nation’s leaders will fail to deal with rising budget deficits and debt. “We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” New York-based S&P said today in a report. “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”As noted, the markets are in disarray. The cost of insuring American trash--I mean Treasury bonds--has been rising, too:
Longer-term Treasuries fell, reversing earlier gains, after S&P lowered its outlook to negative from stable. The cost to protect against a default by the government and the nation’s banks jumped and stocks declined after the New York-based ratings firm’s action, which assigns a one-in-three chance that it will lower the U.S. rating in the next two years.
“It’s truly a shot across the bow and a message to Washington, which has been clowning around on this and playing politics when they should toss ideology aside and focus on achievement,” said David Ader, head of government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The bond market is still trying to find out what to make of it. People don’t know what to do. If you sell Treasuries, what do you go in to? No one knows...”Why so? I don't think there's any mystery here as the US has been the only major industrialized country to pile on debt at an astonishing pace. So it is that there is now a 33% chance of America losing its AAA status within two years:
The cost to protect against losses on Treasuries in the credit-default swaps market jumped to the highest in 11 weeks. Credit-default swaps on U.S. Treasuries climbed 7 basis points to 48.5 basis points as of 10:25 a.m. in New York, according to data provider CMA. That’s the highest level since reaching 49.4 basis points on Feb. 1 and means it would cost the equivalent of 48,500 euros a year to protect 10 million euros of debt against default for five years...
The U.S. is the only large AAA rated country that saw its debt rise during the crisis that until recently had no plan that would reverse the trend, Steven Hess, senior credit officer at Moody’s, said last week.A welcome development indeed. As before, I am fully on board with the idea that whacking America via penalty rates is the way to go to get some semblance of normalcy in the world economy. Among other things I would like to see:
The negative outlook by S&P means that the firm views a one-in-three chance it will cut a borrower’s rating within a two-year horizon, David Beers, S&P’s global head of sovereign and international public finance ratings, said in a Bloomberg TV interview. “This debate in the country really is just beginning and hard choices are going to have to be made,” Beers said. “We’re not saying that no agreement is possible. We’re just unsure as to the time frame and whether it’s going to be seen as credible not just by us but by the broader marketplace.”
- The other two major agencies (Moody's & Fitch's) following suit with a negative outlook;
- Rising long-term interest rates Stateside sufficient to dent the housing-industrial complex; and my absolute favourite...
- US default on its debt due to failure to raise its debt ceiling come May--the starkest foretaste of them all
UPDATE: The FT has a copy of the S&P credit watch report. The following reasons are given as to why "peer" AAA countries (the UK, France, Germany and Canada) are on a more sustainable path than the US, having already begun processes of fiscal consolidation:
While thus far U.S. policymakers have been unable to agree on a fiscal consolidation strategy, the U.S.'s closest 'AAA' rated peers have already begun implementing theirs. The U.K., for example, suffered a recession almost twice as severe as that in the U.S. (U.K. GDP declined 4.9% in real terms in 2009, while the U.S.'s dropped 2.6%). In addition, the U.K.'s net general government indebtedness has risen in tandem with that of the U.S. since 2007.I've blogged about how the Canadians set the standard for intelligent discussion on how to broach the issue of fiscal consolidation to the public. Contrast this to the pro wrestling-inspired shenanigans Stateside and I needn't explain why the US is such a train wreck. Next stop: going off the rails on the crazy train America.
In June 2010, the U.K. began to implement a fiscal consolidation plan that we believe credibly sets the country's general government deficit on a medium-term downward path, retreating below 5% of GDP by 2013. We also expect that by 2013, France's austerity program, which it is already implementing, will reduce that country's deficit, which never rose to the levels of the U.S. or U.K. during the recent recession, to slightly below the U.K. deficit.
Germany, which suffered a recession of similar magnitude to that in the U.K. (but has enjoyed a much stronger recovery), enacted a constitutional limit on fiscal deficits in 2009 and we believe its general government deficit was already at 3% of GDP last year and will likely decrease further.
Meanwhile, Canada, the only sovereign of the peer group to suffer no major financial institution failures requiring direct government assistance during the crisis, enjoys by far the lowest net general government debt of the five peers (we estimate it at 34% of GDP this year), largely because of an unbroken string of balanced-or-better general government budgetary outturns from 1997 through 2008. Canada's general government deficit never exceeded 4% of GDP during the recent recession, and we believe it will likely return to less than 0.5% of GDP by 2013.