The Ratings Route

So even after the debt deal, the US is still likely to lose its Aaa rating. This is news?

A few weeks ago Standard and Poor’s put the United States Federal Government on Creditwatch with negative implications. This is bond-geek speak for, “I’m gonna downgrade you unless you prove to me that I shouldn’t.” They noted in their comments that unless the government significantly alters the structure of the contractual payments that we call entitlements, they will downgrade us. The current deal doesn’t do that.

Some say the current deal is a down-payment on that change, and S&P would be crazy to downgrade the US in the midst of a political debate. Maybe. Certainly they will be criticized (see here for a sample: ). But I see the political debate differently. This is the second time in the past 20 years that political machinations over the debt ceiling have threatened a delay in contractual payments by the United States. That means something.

Credit analysis measures the ability and willingness of debtors to satisfy their obligations. The ability is not in question. While the present value of Medicare, Medicaid, and Social Security is an eye-popping $75 trillion, the present value of labor in the US is something like $150 trillion. We’re not insolvent.

No, the willingness to pay is the issue here. A politically divided country where a significant fraction of the lawmakers will seriously consider payment default to make a political point is not a Aaa counterparty any more. The debate in 1996 was a fluke. This debate was not.

All good things come to an end: sic transit gloria mundi. It looks like our Aaa credit rating is one of these. Call us the US of Aa.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2017-07-17T12:35:03+00:00 August 2nd, 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. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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