What's Next? 2nd S&P or 1st Fitch's US Downgrade?

♠ Posted by Emmanuel in , at 10/27/2011 12:12:00 PM
I've gotten bored of Europe's so-called problems. All this time I've kept a lot of my cash in euros and for this cheap Yankee talk about Euro-collapse, it's back above $1.40. Like I said, markets realize what real money is as opposed to play money.

Which brings us back to America--a place with real problems and a quite useless currency to boot. Giving away the store, the above title is pretty much a pointless question since both will probably occur nearly simultaneously, conditioned as they both are on the imminent failure of the deficit commission to come up with something constructive before year's end. Given the current state of efforts to significantly reduce the size of American fiscal deficits going forward (i.e., nuthin'), both are pretty much baked in the cake unless major evasive action takes place. Which is worse? Having two out of the three major global rating agencies whack US debt from AAA will likely have more repercussions insofar as a majority opinion is required to cement the status of most sovereigns among bond traders.

Let us begin with S&P's continuing threat to move the US further southbound. From a previous post on the first S&P downgrade, we noted that it mentioned...
The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’...
We see at least a one-in-two likelihood that we could lower the long-term rating by one or more notches on the U.S. within the next three months and potentially as soon as early August — into the ‘AA’ category — if we conclude that Washington hasn’t reached what we consider to be a credible agreement to address future budget deficits.
There has also been much made in the past few days over a Bank of America - Merrill Lynch report indicating that for a Moody's downgrade (it has a negative outlook on US debt) "[t]he trigger would be a likely failure by Congress to agree on a credible long-term plan to cut the U.S. deficit." FT Alphaville has more of the specifics of near-inevitable deficit commission deadlock continuing as the deadline nears to identify $1.2T in cuts...
The “not-so-super” Deficit Commission is very unlikely to come up with a credible deficit reduction plan. The committee is more divided than the overall Congress. Since the fall back plan is sharp cuts in discretionary spending, the whole point of the Committee is to put taxes and entitlements on the table. However, all the Republican members have signed the Norquist “no taxes” pledge [see here] and with taxes off the table it is hard to imagine the liberal Democrats on the Committee agreeing to significant entitlement cuts. The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan. Hence we expect at least one credit downgrade in late November or early December when we expect the super Committee crashes.
So both S&P and Moody's vow further downgrades should the deficit committee do the nearly inevitable nothing. While I remain wary of credit rating agencies and think that we and not some agency is ultimately responsible for performing due diligence on the financial soundness of various institutions, it's still nice to have the US get its due. While recessionary conditions Stateside are depressing Treasury yields for now, there is no doubt that American prestige from being further removed from the top rank of the world's most creditworthy nations is a serious blow.

It could use more downgrades too until it's brought to its senses.