8.06.2011

S&P Downgrade of the U.S. 4 days after debt ceiling deadline. Really? Are you dumb or cowardly?

Standard and Poor's - they of the eponymous 500 - downgraded U.S. debt from AAA to AA+ on Friday. That means that U.S. borrowing could need to pay higher interest to offset the new risk.

S&P has been criticized for this, probably by many who have seen the move as 'unpatriotic.' Let's forget that and ask two simple questions:

1. Why did it take until Friday?

The debt ceiling deadline was Tuesday. The deal got done Tuesday. S&P claims it is concerned about the politicization of the debt ceiling process. Fair enough. I have concerns too. But those concerns were, if nothing else, lessened by Friday. If S&P really believed that the process created risk, why did it leave investors to twist in the roiling winds of the market this week before making its assessment?

2. Did S&P pay any attention to the market this week?

The DJIA (Dow Jones Industrial Average) gave away all the value it gained this year, tanking 500 points Wednesday and barely bouncing back by Friday. Where did investors go as stocks (equity) dove? They went to bonds, specifically Treasuries. So the market players are still saying that U.S. Treasuries are the low-risk investment of choice. They clearly don't see the risk S&P sees.

And, again, if S&P throughout this months-long process thought the U.S. was riskier, didn't it have an obligation to speak up before the market tanked and investors would predictably head to Treasuries?

Instead, S&P downgraded Friday, after the market reaction to the resolution of the debt ceiling fight played out. That way, their downgrade would have little to no effect on the market. If so, what is the point of the rating at all now that market participants have shown their preferences? S&P, if you are to have any value at all, how about a rating when it matters?

1 comment:

thegameiam said...

I didn't read S&P's stated reasoning, but the timing would make sense if it wasn't the debt ceiling per se that was TW issue; rather it's the fecklessness of all parties concerned with regard to the necessity of not spending more than we take in. ie, it's not the debt ceiling, it's the debt to income ratio...

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