Timing of S&P U.S. downgrade couldn’t be better
By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
The Standard & Poor’s downgrade of the United States couldn’t have come at a much better time. Markets may be wobbly, but interest rates are at historic lows and buyers of U.S. debt are plentiful as the world braces for another economic slowdown. There may be some initial turbulence when investors return on Monday, but if the rating agency waited until markets acted first the consequences would be far more severe.
After all, the rating agency’s decision shouldn’t have come as a shock. S&P made no secret of what it expected from the debt ceiling brawl that put the full faith and credit of the largest debtor nation in the world on the line. It wanted roughly $4 trillion in deficit reduction and a credible plan to fix longer-term deficit problems. It got neither.
Yet despite expectations of a downgrade, during last week’s financial market rout investors plowed into U.S. Treasuries. Ten-year yields fell as low as 2.34 percent. With few alternatives at their disposal, it will take more than the downgrade by one closely-watched rating firm to change America’s go-to status for investors in times of trouble.
Anyway, the fact that Fitch Ratings and Moody’s Investors Service affirmed their AAA ratings also should keep a lid on any forced selling in credit markets as investors with mandates to hold only top-rated debt can lean on the opinions of the other two raters.
Moreover, it’s hard to see an alternative to S&P’s verdict having much of a salutary effect on markets. For starters, affirming its AAA rating, after it had aggressively drawn its line in the sand, would have destroyed S&P credibility with investors — far more than the $2 trillion error it initially made in its assumptions.
Even worse, it would have sent a signal to Washington that its political shenanigans come without consequences. It’s better for S&P to call out the failings of America’s leaders before global investors do. The euro zone’s woes serve as a cautionary tale of how swiftly investors lose confidence — and how difficult it is to regain.
S&P’s unprecedented downgrade serves U.S. lawmakers notice that their inability to govern and their willingness to hold creditors hostage has consequences. If losing the AAA crown is what it takes to knock heads together, that’s far preferable to waiting for markets to unleash their wrath.