Will the U.S. ever get its triple-A back?

By Felix Salmon
August 1, 2011
All Things Considered last night, and told Guy Raz that "once you lose your AAA, it's gone" -- following that up for good measure with the statement that "I cannot remember the last time that anyone got upgraded to AAA.". But was I right?

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I went on All Things Considered last night, and told Guy Raz that “once you lose your AAA, it’s gone” — following that up for good measure with the statement that “I cannot remember the last time that anyone got upgraded to AAA.” But was I right? Reckoning that if I was going to opine about such things on national radio, it might be a good idea to have a vague idea of what the truth of the matter is, I put the wonderful Roy Strom on the case. And he found this list of all S&P sovereign ratings actions since 1975.

The last time that a country became triple-A was February 16, 2004, when Sweden got upgraded from AA+. The triple-A-sovereign club currently has 16 members, including Sweden. The US has had the top rating since 1941; the next longest-serving member of the club is France, which got its triple-A in June 1975. Then, in order, come Austria, the UK (1978), Germany (1983), Switzerland, Holland, Luxembourg, Singapore, New Zealand, Liechtenstein, Denmark, Finland, Canada, and Australia.

The most recent entries on the list — Denmark, Finland, Canada, Australia, and Sweden — are all countries which got downgraded and then reinstated. And when you do lose your triple-A, you have to expect to remain in the wilderness for at least a decade. Australia, for instance, was downgraded in 1986, and only got back into the club in 2003. The record from downgrade to reinstatement is held by Canada, which was downgraded in October 1992, and got its triple-A back 9 years and 9 months later in July 2002.

The list of triple-A sovereigns is very, very white — Singapore is the only exception to the whites-only rule. (And Hong Kong, if you allow sub-sovereigns: it got its triple-A in December.) It seems inevitable that the future is going to be a story of white countries falling off the list, with non-white countries joining it, led by Taiwan. But in the short term, a US downgrade would simply just make the list shorter — and there are bound to be lots of reports about how the US has a lower credit rating than Liechtenstein.

My guess is that once the US loses its triple-A, it’ll be gone forever. Downgrading the US is something no credit rating agency wants to do; you know they’ve been dragging their heels on this one. The debt-ceiling debate alone is sufficient reason to downgrade the US: if we came that close to defaulting, there’s no way that our securities can be risk-free. A downgrade will merely be a late-to-the-party recognition of that fact. And once it’s recognized, it can’t be forgotten.


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“Forever” seems like a long time.

Posted by david3 | Report as abusive

Once again… AAA risk free. Interesting date for the UK getting a AAA rating given that a year or so before that it was getting bailed out by the IMF and was rapidly disappearing down the drain 1978-1979. Also only a cretin – or a genius who could predict Maggie would win – would have bought UK govvies at that time and would have had quite a ride with the spike in interest rates in her first term.

Posted by Danny_Black | Report as abusive

AAA is not risk free.

Posted by Danny_Black | Report as abusive

So I see headlines (on the same news sites) that say “Economists complain this is not the time to be cutting spending,” while other headlines say “Spending cut decisions pushed off to the future.” Do you wonder why the media ranks right there with Congress in trustworthiness? It’s simply not possible to tell what is going on by reading the news, and it’s very frustrating.

Posted by Curmudgeon | Report as abusive

So whenever you say “I cannot remember”, what you really mean is: “I have no idea”.

Posted by ACMurray | Report as abusive

This piece, like your ATC interview, was a bit loose, too.
But at least you admitted your hyperbole. And while hyperbole is the flavor of the moment, I’ll just say that it is quite possible we are entering an era when it simply won’t matter what our credit rating is. So it would really just be an academic point anyway.

Posted by BowMtnSpirit | Report as abusive

Curmudgeon, the “spending cuts” under this deal (and they’ve only agreed to less than half of them so far) are only about 20% of the ongoing deficit.

That leaves 90%+ to go…

I would agree with “spending cut decisions pushed off to the future”.

Posted by TFF | Report as abusive

Sweden and Canada are interesting case-studies: credit crisis, economic crisis, fiscal crisis, austerity, growth, prosperity, upgrade to AAA. The credit agencies are lagging indicators, especially when it comes to sovereigns. And they lag by design.

The US hasn’t been AAA since ’05 or so, truth be told. We weren’t really AAA in 1941, with a two-front war brewing. In 1955 our Debt-to-GDP ratio was 150%–higher than Japan’s (when you consider debt held by the public). We didn’t earn our AAA rating until after Volker began to tame inflation–say, in 1982 or so.

Dean Baker asks what it means for a sovereign to default in its own currency. I understand why Washington Public Power Supply System (another Government AAA issuer) defaulted: they couldn’t put their hands on enough Dollars. And I understand why Greece or Ireland may default: they can’t get the Euros. But what would a Swedish default in Krona or a Canadian default in Loonies or a US default in Dollars look like?

I don’t think S&P or Moody’s or Congress or any of the journalists have the answer to that one. But I’ll keep looking.

Posted by Publius | Report as abusive

TFF – I see you are giving it 110%. . .

Posted by Ragweed | Report as abusive

Ragweed, the deal claims $2 trillion of spending cuts, but less than $1 trillion has actually been agreed upon. Not sure how to count the automatic cuts that will kick in if they fail to agree on another $1.2 to $1.5 trillion?

Considering the difficulty Congress had in agreeing to this much, I have little confidence that they will ever agree to the amount necessary to truly fix the budget deficit.

Posted by TFF | Report as abusive

So, after all the posturing all we got were meaningless decreases in the projected increases and Obama basically got what he first requested, an up [or down] vote on the debt ceiling.

The rich keep getting richer at the expense of the poor.

Posted by ptiffany | Report as abusive

Publius: To what extent are countries that deliberately inflate to devalue debt treated differently by creditors from those that simply default by the same amount? If one country pays 30 cents on the dollar, and another prints enough money that prices increase by 10/3, are bond markets a lot more forgiving of the latter strategy?

I would think I would prefer to default rather than inflate if the consequent borrowing constraints are at all similar. All the knock-on consequences of default would be there for inflation, as would the loss of an effective currency and the extra economic disruptions that would create; on some level, then, even the bond markets should prefer the outright default, as that should have less bad economic consequences and should less impair the country’s ability to pay real value for debt incurred in the future. I don’t know that it actually would work that way; I just think it very much ought to. I’d be interested in clear evidence it doesn’t, especially if that evidence comes with a compelling explanation.

Posted by dWj | Report as abusive

The point is that defaults by nature tend to involve substantial disorder whereas inflation can be allowed to incrementally reduce the real value of debt over a longer period (& the compounding effect of even moderate inflation in a low rate environment such as the UK can be very strong) without creating a crisis situation & a concomittant destruction of value.

Posted by rosetinted | Report as abusive

“I would think I would prefer to default rather than inflate if the consequent borrowing constraints are at all similar.”

Inflation helps to deleverage the entire economy, as it erodes all debts in that currency. Formal default merely repairs governmental debt.

Over the past thirty years, the US has transferred massive amounts of wealth from the younger generations to the Baby Boomers through tax cuts spanning that generation’s peak earnings decades, massive governmental borrowing to be paid for by future workers, and expansions in Social Security and Medicare.

The Baby Boomers will vote en masse against any formal erosion of the benefits they promised themselves, leaving inflation as the only avenue by which the younger generations might claw back a portion of their livelihood.

Default doesn’t cure that economic imbalance.

Posted by TFF | Report as abusive

Two weeks ago, despite a reasonably strong earnings season, fears of a debt crisis started casting a shadow over the stock market. Now we have a debt deal, one that isn’t particularly unfriendly to business as far as I can tell, and the market continues its slide.

Are we experiencing what I feared the most? That a grand-standing Congress would tip a chaotic system into decline. I think everybody expected that they would reach SOME deal, but the uncertainty and the acrimony involved has led to rising doubts about the economy.

The markets, and the economy as a whole, are a confidence game. When people have confidence in them, they expand. When confidence fails, they fall. The Shiller P/E index has warned of a 30%+ decline for a year now. Has Congress pushed us over the edge?

Posted by TFF | Report as abusive

$685 billion budgeted for defense spending this year. China budgeted $95 billion.

Nobody else is even close.

And Leon Panetta says we have to be careful about cutting defense too much in view of our worldwide commitments. The current budget deal cuts an average of $35 billion per year.

Here’s an idea. Why do we have so many worldwide commitments? Why did we build 192 F-22′s at a total cost of $64 billion, and the F 22 has never flown a combat mission?

If I was an assymetrical warrior sitting in my cave in 2000, I would look at the US, with its shrinking budget deficits, and ask, what is the best way to wreck America.
And the answer might be, let’s commit a heinous act of terrorism, and maybe the hawks in America would use it as an excuse to fire up the American reaction to “kick somebody’s ass”. Then the Americans would start spending huge amounts on defense, with big budget deficits.

Jack (of Jack and the beanstalk) did not kill the giant head on. He got the Giant to chase him, let the giant trip, and the Giant died from the fall.

Osama bin Laden did not wreck our economy. He just tricked us into doing it to ourselves.

Posted by randymiller | Report as abusive

It seems clear to me that the US faces firstly a moral crisis. There are few grown-ups among the political elite and demonizing the enemy is a sure way to have no solution. Politics of division ensure that no good solution is reached. Political correctness and diversity have become the highest virtues for our leadership when for most Americans this is absurd in the face of an existential crisis.

No substantial budget cuts were agreed upon, and Obama fought bitterly not for the future of America but to ensure no cuts or debt ceiling issues arise during his 2012 campaign. Republicans are unwilling to consider tax increases to pay for a welfare state that they never agreed to in the first place.

Felix Salmon desperately advocates that we should have tax rates that are more like Europe, but Europe seems completely cooked. They have higher average human capital than we do, so therefore their systems must really be a lot worse, economically.

Europe is on the verge of what seems like breakup and/or demographic decline and this seems like a really bad time for the US to have lost its bearings.

Posted by DanHess | Report as abusive

I’m puzzled that securities ratings by groups such as Moody’s seem to still carry perceived risk-assessment value without any system in place for rating their own performance. Is it rational to rely on an unrated rater? Hasn’t the last 3 years shredded any remaining fig leaf of confidence based on their historical performance at assessing risk?

To the extent that their ratings reflect political or other considerations rather than real monetary risk, aren’t we indirectly subsidizing investors who are *not* statutorily required to continue to rely on their “best judgement”?

Posted by melior | Report as abusive

Downgrading the US is something no credit rating agency wants to do; you know they’ve been dragging their heels on this one.

I am amazed at your confidence in the honesty and competence of the rating companies. You refer to them as if they are no more harmless than our old auntie who refrains from criticizing us until she can’t hold her tongue any longer. Totally non-political actors, eh?

That is not the impression I have gotten about these companies at all.

Posted by TonnyZ | Report as abusive

melior, these firms have a regulatory cover. Certain firms are only allowed to invest in products rated a certain way by certain companies. Another example of how regulation distorts investment decisions.

Posted by Danny_Black | Report as abusive

Thank you TonnyZ

the rating agencies have enormously enjoyed their time in the spotlight and are no doubt amazed at how uncritically their “analyses” have been repeated by the media. A wonderful distraction from their performance 2001-2007.

Posted by johnhhaskell | Report as abusive

Thanks for your thanks, johnhhaskell.

I am TonnyZ! The website somehow managed to forget my email and registration completely, so I had to register again with a different handle.

I have a lot of respect for Felix, so I just feel confused about his statement. It seems so clueless, just as you say, about the behavior and performance of these companies (note I refuse to call them agencies, because they are for-profit companies) over the past decade.

I suspect it was a bit of a throw-away comment. Such is the nature of incessant blogging.

Also, did anyone notice that the ratings agencies all suddenly piped up at the same time, at the very end of the process, after months of this game going on, with the same sort of generalized complaint about how the US handles its finances? I don’t find their analysis to be objective, public-minded or indicative of any sound process.

They shouldn’t be used as evidence of anything here.

Posted by TonnyDZ | Report as abusive

TonnyZ, not sure what “months of this game going” means but 5 seconds search finds an Oct 2010 report talking about the threats to US AAA rating:

http://www.standardandpoors.com/ratings/ articles/en/us/?assetID=1245230849292

and there was mutterings about a US downgrade in 2009:

http://www.thisislondon.co.uk/standard-b usiness/article-23697332-oecd-attacks-sp -for-inexplicable-downgrade.do

But hey who cares about facts right?

Posted by Danny_Black | Report as abusive

johnhhaskell, and the percentage of debt marked as AAA by the agencies in 2001-2007 that defaulted is?

Posted by Danny_Black | Report as abusive


You might want to read the links you provide:

“Professor Peter Spencer, chief economic adviser to the highly regarded Ernst & Young Item Club, added: “They completely missed the financial crisis and are trying to regain some credibility. But at the end of the day, when the next problem occurs, they’ll be asleep at the wheel again.”

He said investors would most likely ignore S&P’s warnings.”

Further, I am unimpressed by a statement from S&P’s own website. You do know they have a pr department that is fully capable of getting whatever news they want right into the national newstream, right? A page on their website is weak sauce indeed.

They are playing the same game as all the GOP. The economy was great until Obama won the election. Unfunded wars, Medicare Plan D, unfunded tax cuts, pushing down interest rates to absurd levels to try and goose the economy for political gain, killing the M3 calculation (if memory serves) because it made the Bush Admin look bad, everything but everything was a-ok.

Then, suddenly, once Obama won, we developed serious economic problems. Oh, the seniors are getting older! Well where were they in 2007? Were the seniors not approaching retirement age then? Oh that’s right, S&P was busy rating complete crap as triple A and getting huge bonuses for doing it.

Posted by TonnyDZ | Report as abusive

TonnyZ, I have zero sympathy for Rating Agencies who are an anachronism held over from the 30s. I was simply pointing out your claim that they were making noises about the US credit rating in the last few months was factually incorrect. Of course, you then proceed to prove that facts are not important to you.

Who exactly got “huge bonuses” at the rating agencies for “rating crap as triple A”? Also what percentage of AAA rated debt between 2001 and 2007 actually defaulted?

Posted by Danny_Black | Report as abusive

Look Danny, I am tiring of your suggestive rhetorical questions. If you have answers then provide them.

I don’t care what percentage of AAA rated debt actually defaulted, because I know that billions of dollars of such paper ended up being worth pennies on the dollar at best. If you are arguing that the rating agencies didn’t rate billions of dollars as triple A only to have them lose almost all their value, then make the argument already, it would be wrong but you are allowed to try of course.

The percentage of all the paper rated as triple A which technically defaulted is irrelevant and could be highly misleading. Which presumably is why you harp on this particular statistic.

I pointed out that the very article you linked to stated the exact same points I made. Yes, you disagreed with me by linking to… an article that agrees with me completely. Thank you, you really are too kind. Who needs facts when I have this kind of competition?

Once again, the rating companies suddenly got worried about the US debt right after a Democrat took office. Before that, they made nary a peep about US debt, while Bush and Co. spent wildly, all on US credit.

Now, they have downgraded the US ostensibly because of the brinksmanship of the GOP. But, conveniently, downgrading the US will hurt the current administration more than the GOP.

Posted by TonnyDZ | Report as abusive

“johnhhaskell, and the percentage of debt marked as AAA by the agencies in 2001-2007 that defaulted is?”

I don’t know, Danny_Black. If you elaborate on this, I would be interested in the answer. (Debt that was ORIGINALLY rated AAA that EVENTUALLY defaulted, I presume? Downgrading the debt a month before the default doesn’t fix the problem.)

Posted by TFF | Report as abusive

TFF, I actually don’t know the figure. Would be genuinely interested in knowing but not enough to actually do any serious research, I would be shocked if by amount issued it is more than 2% and by any measure even close to double figures. Maybe an intrepid reporter will bother to check these figures rather than shreking about how the credit agencies got it all wrong.

There is a reason why I “harp on this particular statistic” and that is because credit ratings are meant to be a measure of exactly one thing and that is the default rate. Contrary to what people seem to think it doesn’t measure anything else. Doesn’t mean “safe”, except in the technical sense that it will meant its contractual obligations. Most certainly does not mean that the price will not be volatile or you will not lose alot of money “investing” or trading it.

TonnyZ, I can see you are yet another one of these people who has difficulty reading. You made a very specific claim – ie that ratings agencies only very recently jumped on this band wagon within months. That claim is simply false and that was all the links I posted were meant to demonstrate. Spouting a load of other gibberish doesn’t make it any less false. Have fun arguing with what you apparently think i said and not what i actually said.

Posted by Danny_Black | Report as abusive

If none of the AAA rated MBS traunches defaulted, it is because TARP kept them from defaulting. S&P, Moody’s, and Fitch still have not restored our trust in ratings agencies.

I work for a very successful company; one of the reasons we are successful is because we realize that we can still screw up enough to go broke. If this S&P downgrade reminds us that the US can go broke, and we take action, then the downgrade is a good thing.

There is a lot of low hanging fruit when it comes to the budget. WE can cut military spending, we can cut farm subsidies, we can rationalize our health care system. On the revenue side, we can go to a $12,000 standard deduction, close loopholes like the mortgage interest deduction, simplify all our lives, and raise a lot of revenue.

Obama has been very good at getting elected, but he has been a weak leader. He deferred to the dems in congress on health care, and we got a weak bill. He still defers all the time. Bush was a much stronger leader, and could get Congress to comply with what he wanted. Unfortunately he was leading us in the wrong direction.

And when I look at the crop of Republicans running, I do not see a strong leader who will lead us in the right direction.

So maybe S&P is doing us a favor in firing this warning shot across our bow.

Posted by randymiller | Report as abusive

TARP would have done nothing to stop MBS tranches defaulting. The government intervention that MAY have stopped any defaults would be the “conservatorship” of the GSEs and bringing the rates down so low that people could still make their payments.

By the way ABS is not a huge part of the AAA market.

Posted by Danny_Black | Report as abusive

Sorry private sector ABS. Obviously GSE issued MBS were implicitly wrapped by the government and now are explicitly backed by the US.

Posted by Danny_Black | Report as abusive