August 8, 2012

AP’s Wiseman Claims Year-Ago S&P Downgrade Has Seen a ‘Decisive Repudiation’

A year ago, Standard & Poor’s cut its rating of U.S. government debt from AAA to AA+.

Very early Monday morning, in what read more like an Obama administration press release than a wire service news report, Paul Wiseman at the Associated Press claimed that subsequent events and other agencies’ decisions not to deliver similar downgrades represent a “decisive repudiation” of S&P’s call. Gee, I think an element of other agencies’ holdbacks had quite a bit to do with the Obama administration’s almost immediate move to launch an investigation into how S&P handled the ratings of mortgage-backed securities leading up to the housing and mortgage lending mess in 2008. The others didn’t want to become the Department of Justice’s next targets. But of course Wiseman didn’t bring up that inconvenient point. Excerpts follow:


The rating agency Standard & Poor’s stunned the world a year ago by stripping the U.S. government of its prized AAA bond rating.

The downgrade of long-term U.S. Treasurys threatened to sow chaos in financial markets, driving up U.S. interest rates, pushing the dollar down, scaring investors away from stocks and into that traditional refuge for the fearful: gold. The Dow Jones industrials dropped 635 points in panicked selling the first day of trading after the S&P announcement.

A year later, S&P’s historic move looks like a non-event.

… Rival rating agencies Moody’s and Fitch have said they might downgrade the U.S. government’s blue-chip rating, too, though neither has followed S&P’s lead.

It is difficult to imagine a more decisive repudiation of S&P’s warning that the U.S. government might not be able to pay its bills.

Y’know, that last excerpted sentence looks like it might have been lifted from a “helpful” Obama administration email. What say you, Paul?


Despite S&P’s warnings and the political stalemate, investors still want U.S. Treasurys. Given economic turmoil in Europe and uncertainty elsewhere, U.S. government debt and U.S. dollars look like the safest bet around.

But the United States owns what amounts to the world’s currency. Global business is largely done in dollars, which keeps demand for the U.S. currency high and reduces the likelihood of a dramatic drop.

And as bad as things are in the United States, they are worse elsewhere, particularly in Europe. For the United States, the day of reckoning over the federal debt is probably years off: America’s budget problems will worsen gradually as the Baby Boom generation retires and starts collecting Medicare and Social Security benefits.

So we’re not at death’s door like much of Europe. Gosh, Paul, I’m so relieved.

S&P’s and the other rating agencies’ responsibility is to investors, not the Obama administration. Their duty is to advise investors of the risks involved in holding primarily long-term debt sovereign debt instruments, not to keep the governments they are rating happy.

A widely used benchmark for when a country has hit a point of no return is when its public debt reaches 90% its annual output expressed as Gross Domestic Product (GDP). Currently, the U.S. public debt is $11.12 trillion (this excludes “intergovernmental holdings”; I’m personally not convinced that the exclusion is valid), while current-dollar GDP is $15.596 trillion, meaning that our public debt-to-GDP percentage is 71%. At the end of 2008, three weeks before the beginning of the Obama administration, public debt-to-GDP was 45% (the USA piece cited later says 40%, but I believe my calculation is the accurate one). In 3-1/2 short years under Obama, the ratio has advanced to the point where continued sky-high budget deficits plus additional “off-budget” debt issuances combined with mediocre GDP growth make crossing the 90% threshold a sadly realistic possibility within five years, if not sooner.

Since treasury securities have maturities as long as 30 years, the idea that the federal government could very well hit a financial wall in about five years (even the CBO has acknowledge that we’re on track to hit the wall in about 2021) seems, well, kind of relevant — at least to investors who expect their money back when their bonds mature decades from now. But it appears AP’s Wiseman didn’t even consider that.

I should also note that Wiseman didn’t give S&P’s side of the story. USA Today did, as follows:

“S&P sticks by its decision,” said Chambers, the 56-year-old chairman of S&P’s sovereign-debt rating committee. “Since the downgrade, our projection for the national debt as a percentage of the economy in five years has actually gotten worse.”

… On June 8, S&P issued another warning: There’s a 1-in-3 chance it will cut the U.S. rating again by 2014.

With a continuation of we’ve seen in the past 3-1/2 years, why wouldn’t they?

Cross-posted at


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