S&P knocks U.S. debt down a notch

Thursday, 11 August 2011 00:00

During this past weekend, rating agency Standard & Poor’s (S&P) downgraded the sovereign debt of the United States by one notch, from AAA to AA+, with a “negative outlook,” meaning there is danger of further downgrades in the future. Other rating agencies, notably Moody’s and Fitch, are staying for now with their AAA equivalent ratings, though Moody’s carries a “negative watch.”

The United States now has a “split rating” — meaning inconsistent — from the top agencies.

There are two chief criteria that lenders consider in making a loan. The first is ability to pay. The second is willingness. No one questions the ability of the United States to pay its debts at this time. However, the circus in the House of Representatives raised the question of whether we are willing to pay, and long term, whether paralysis in our political institutions will undercut our ability to pay. As S&P stated, the downgrade reflected its view that “the effectiveness, stability, and predictability of American policy making” have weakened at a time when we face “ongoing fiscal and economic challenges.”

Adding an element of farce, White House number crunchers noticed that S&P made an arithmetic error that erroneously underestimated savings under one scenario by about $2 trillion. S&P acknowledged the error but went ahead to issue the US downgrade, warning of the danger of more to come. Luckily for some staffers at S&P, the danger of further unwelcome publicity should prevent anyone from getting fired over this gaffe. To paraphrase Senator Everett Dirksen’s famous remark: A trillion here, a trillion there, and before you know it, it adds up to some real money.

The debt downgrade occurred in the midst of fierce political jockeying. The recent stalemate and unsatisfactory resolution in Washington sprang from posturing by junior Republican representatives associated with the Tea Party. If your 401-K has gone down, say, by 10% recently, you might be sticking pins into an Eric Cantor voodoo doll.

However, on a longer view, Democrats going back to FDR initiated most of the entitlement programs now weighing down on us, funding them primarily on a “pay as you go” basis. An exception was George W. Bush’s complex and expensive prescription drug program for the elderly.

As for the clutch of Republican presidential candidates, we can’t speak of courage. Rep. Michele Bachman, Rep. Ron Paul, Tim Pawlenty, Rick Santorum and the numerous others almost unanimously came out against a debt ceiling increase.

Romney equivocated until the last minute and then came out against. Only former Utah Governor Jon Huntsman backed an increase, stating, “A debt crisis like this is a time for leadership, not a time for waiting which way the political wind blows.” Huntsman could perhaps prevail as the only real practicing centrist in the coming Republican primaries, leaving others to divide the conservative vote.

He is the kind of Republican who potentially could beat President Obama in a weak economic environment.

On Sunday, in the wake of the S&P announcement, the European Central Bank announced that it would intervene aggressively in markets to shore up Spanish and Italian government bonds, and implicitly, to keep the cost of sovereign refinancing lower.

The ECB is desperate to prevent Spain and Italy from falling into the vortex swirling around the much smaller economy of Greece. New York Telephone used to advertise, “We’re all connected.” We are now seeing the dark side of that moon.

Andrew Szabo is Managing Director of Greenwich Financial Management (dba). Securities offered exclusively through Choice Investments, Inc., member FINRA/SIPC. Questions and comments, contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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