Ratings Ravings

As expected, S&P cut our rating. What does this mean?

Late Friday S&P announced that US Government debt is rated AA+. This puts our debt on par with Belgium, Italy, and Japan. In its comments, S&P blamed lawmakers for failing to reign in our long-term fiscal deficit. They kept the outlook negative, and noted that they may drop our rating another notch to AA within two years if the deficit remains at such an elevated level.

In practical terms, not much will change. Moody’s and Fitch both affirmed the US at Aaa. Most legal restrictions on investing either put sovereign debt in a different category or require Aaa ratings from one or two ratings agencies. There will be some fallout in other bond-sectors. Normally ratings firms follow a “sovereign ceiling,” whereby the highest rating in a country is that of the central government. That’s clearly not the case here: Exxon Mobil, Johnson and Johnson, and Madison, Wisconsin haven’t been listed as downgrade candidates.

There will be plenty of finger-pointing—at Republicans, at the Administration, at S&P—but the real culprit is the housing bubble and bust. The irony here is rich: S&P helped inflate the bubble with its bogus AAA ratings. After that bubble burst S&P is now downgrading the US government, based in part on a recession it helped cause.

And this raises a major issue: what are ratings good for? At best they are lagging indicators of credit quality. But in the case of the US, I don’t know what it would mean for the US to default in dollars—not delay payments, but really default. What would it look like?

With this decision, S&P continues to forge a campaign for its own irrelevance. As I said before, the irony is rich.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-12T10:42:55+00:00 August 10th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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