Uh-oh!
Officials at ratings firm, Standard & Poor’s, said U.S. Treasury debt no longer deserved to be considered among the safest investments in the World. S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn’t do enough to address the gloomy long-term picture for America’s finances. It downgraded U.S. debt to AA+, a score that ranks below Liechtenstein.
S&P said “the downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” It also blamed the weakened “effectiveness, stability, and predictability” of U.S. policy making and political institutions at a time when challenges are mounting.
In other words, the ship is sinking and the captain and crew are doing nothing but rearranging the deck chairs. S&P was supposed to release this report this afternoon (Friday) but the Treasury Department caused a delay by arguing the math the S&P was using (a $2Tn discrepancy). At 8pm, the S&P decided the Treasury was wrong and went ahead and released the report, not only downgrading our Debt to AA+ but giving us a NEGATIVE OUTLOOK as well. Now we have to contemplate what the effect of this change may be…
Let’s first keep in mind that this was expected. In fact, it’s ridiculous how long it took for someone to downgrade us. JPM estimates that $4Tn worth of treasuries are pledged as collateral by borrowers such as banks and derivative traders. The change in status from one ratings agency is unlikely to trigger any immediate covenants (a primer on Sovereign Debt Ratings) but it may take only one more before borrowers are required to come up with many, many Billions of Dollar of cash or securities to keep their creditors at bay – essentially – it’s a margin call on America!
Well, I say this was expected but I mean by us. We cashed out today (see morning post) but Little Timmy Geithner, who blew his chance this week to resign with America’s credit rating intact under his watch, was on Fox News in April SPECIFICALLY stating that there was “NO RISK” that the US could lose it’s AAA rating. Read the article or watch the video –…
