Timing of S&P U.S. downgrade couldn’t be better

August 7, 2011

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.

Comments

These are the same rating agencies that failed to downgrade Enron and Worldcom until after they failed. And people still take these bozo’s seriously?

Posted by vickster | Report as abusive
 

Didnt think of it in this perspective before but it totally makes sense. Hopefully those knuckleheads in washington get a message, and I really really hope that the american people get the message too that we need to vote all these shameless self serving politicians out so they cant play chicken with our livelihoods anymore.

My fear is that by the time the next election comes around all the politicians will have found a way to use the media and whatever other means to make the american people forget this mess they created.

Posted by rickkhan78 | Report as abusive
 

Perfect timing is not an accident since matters of national security do not happen accidently. Credit agencies that grade US credit ratings can influence foreign countries political relationship with US. It is not hard to understand why US credit rating has such an implication to its national security when countries exchanging value of its citizens labor hours (hours spend into products that are sold to US) and value of its natural resources (oil, metals, etc.) for value of US promise to payback with something of equivalent value (promise in the form of Government issued notes (T-notes) or Fed issued notes (dollars)). So if US promise is undermined by an rating agency then all friendly holders (foreign or domestic) of those promises start to feel they might get something less then equivalent value back, that’s when they may get a little less friendly with the US. But wait! How can US run out of money (promises) and make our friends feel unease?
Make sure they are well supplied with money! HERE COMES THE QE3! But this time around its needed not just to stimulate US economy but to keep world finances in order.

Posted by Tim123 | Report as abusive
 

Ten-year yields at 2.34 percent say it all. Who is right investors or S&P. The private sector, US companies have beaten forecasts 75% of the time. The politicians deserve and F, particulary the amateur tea party congressmen and the President deserves a C. Tea party for bringing us to the brink and teh President for land of 101 Economics. S&P and are right on the political grading but that is not their role. There was never a doubt that bondholders would be paid. That is what thyer are paid to measure. US companies have been exemplary but they will not hire more unless it makes economic sense and the government cannot create pretend jobs @200k a man to solve the mess. Small business would create the necessary jobs if regulations,entitlements and attitudes were adjusted. I use hired 10 now i act alone without a single employee.I did not fire anyone they abandoned their positions and used my goodwill as a training ground for other opportunities . Frankly i would be scared to hire now.

Posted by thoma | Report as abusive
 

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