S&P's Negative Outlook On the US Doesn't Deserve Any Credit

S&P's threat to downgrade the US's credit rating carries little weight. Instead, S&P makes its own role appear risible.

Red flag: S&P's bizarre decision to revise its outlook on US government debt to negative

The news that credit rating agency S&P had revised its outlook for US sovereign debt from "stable" to negative" did seem like a headline from The Onion: "US economy in slump after man fails to buy taco".

Really, S&P? This is the agency that within recent memory assured investors that not only were Bear Stearns and Lehman Brothers blue chip investments but that the various collateral-derivative-swap-trade-debt-obligations were as safe as houses. And let's not talk about the dotcom boom era of the late 1990s.

Given S&P's track record it's probably a good thing if the agency goes ahead and downgrades US sovereign debt – because look what happens when it says everything is fine.

For all the fuss that the S&P outlook revision created – and S&P's practice of publishing such outlooks goes back into the mists of time as far as 1989 – the financial markets shrugged it off. Yes, the stock market fell but by about 1%, hardly a crash. But the Onion-esque fact of the day was that 10-year US government bond prices actually rose by the end of the day's trading on Wall Street. That's right: more people wanted to buy long-dated US government debt after S&P announced its dire warning.

But what is really bizarre is what S&P said in announcing the negative outlook:

We believe there is a material risk that US policy-makers might not reach an agreement on how to address medium and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer AAA sovereigns.

Translating that in English: if American politicians can't agree on cutting the US budget deficit then the US's sovereign creditworthiness will fall below that of the Netherlands, Finland or France (all of which have AAA ratings from S&P). And all this needs to happen by 2013.

Now it's true that US politicians are currently grappling over this subject but did S&P not notice last week that both the Republicans and the White House talked about cutting big chunks off the budget deficit? Obviously they disagree how, but you can't say the subject isn't being debated or that US politicians are avoiding the subject. Are they any closer to doing anything now than a week ago? Hard to say but at least it's being chewed over. Rome's triple-A credit rating wasn't built in a day.

In any case, if S&P's credit ratings have value it is for their economic analysis, not political insight. And did the world really require S&P to reveal the divisions between Republicans and Democrats?

There is exactly one plausible scenario in which S&P could be right: if Republicans in Congress refuse to approve an increase in the debt ceiling limit next month. That would probably force the US government to effectively default but for artificial political reasons, not real financial ones. That's a worryingly real prospect. But S&P didn't mention it.

I can't help thinking that this news, and the possibility that S&P goes through with it and downgrades the US sovereign debt from AAA to AA+++ or whatever, is more likely to harm the rating agency itself than the US. The reality is that under any plausible and many implausible scenarios, the US is not about to default on its debts – or, to put it another way, the US is probably less likely to default on its debts that Finland or France under any circumstances (and I don't mean to be rude about Finland or France in saying this, just in relative economic terms and Greece, Portugal and so on).

The International Monetary Fund seems less worried than S&P, and the IMF's opinion is more credible. Yes, the IMF also says that the US needs urgent fiscal consolidation but it also regards US economic prospects as stronger than any other advanced economy, and that its financial sector is in better shape, meaning the risks of default-inducing shocks are lower.

Even if S&P does follow through and downgrade the US's sovereign debt sometime in 2013 – unlikely though that that will be – after the one-off adjustment that would follow, would much change? Unlikely, unless the world's financial markets can somehow replace US Treasuries and the US dollar at the same time.

Anyway, perhaps we shouldn't be so hung up about credit ratings. Once upon a time the world's banking sector used to be filled with banks proudly boasting of their triple-A ratings. Now there are only five or six banks around the world that get top ratings from all three major credit agencies. (At least one of them, Caisse des Dépôts of France, isn't really a bank at all, and the others are obscure. Kreditanstalt für Wiederaufbau ring any bells? No? How about Bank Nederlandse Gemeenten? Both good as gold.) So the world keeps turning even without a AAA rating. Goldman Sachs seems to manage without one.

Posted by Richard Adams Tuesday 19 April 2011 Guardian.co.uk

And to make you feel twisted in a different way (snark), Thom Hartmann reports that "the banks are getting ready to explode" (again) and they need another "$5 trillion. Will the US taxpayers foot this bill?"

Good question. My guess is "Yes."

But with qualifications.

(Those being that they are now broken up, the miscreants disciplined (jailed is my hope) and actually regulated.)

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