August 06, 2011

With S&P AAA decision, what's next? And who's next?

Ratings: Green=AAA; Turquoise=AA; Lt blue=A; Dk blue=BBB; purple=BB; red=B

First, S&P is defending its decision to take the United States' debt rating down to AA+. Of course it is; it got defensive about AAA ratings of CDOs a few years ago, after its mix of self-interest, naivete and stupidity got exposed.

Second, it will affect the economy:
The ripples caused from the S&P downgrade would affect America’s employment ratings. Less economic activity would mean less demand for workers. Third Way, the non-partisan group published estimates revealing a 0.5 percent increase in interest rates would eliminate over 640,000 jobs.
And, that will only add further pressure to the deficit and debt.

But, the effect may not be too much. Moody's and Fitch have yet to act, and the ratings drop from S&P, even, has a narrow effect:
The Federal Reserve announced that US government securities such as bonds would still be counted as AAA-rated under risk management regulations, an important decision for insurance companies and other investors who would otherwise have been faced with making massive movements in their portfolios.

Third, partisanship will ratchet even higher. S&P said its downgrade was based in part on debt-cutting plans not being "credible." That's an invitation to even more scorched earth tactics from tea partiers in Congress, even though John/Jane Doe tea partiers said last week in polls they're more worried about jobs than the debt.

Fourth, does S&P lose more credibility, beyond the hypocrisy reasons above? It says it wants a more credible plan, and hints the GOP needs to agree to raise revenue, but, will it push harder than Preznit Kumbaya for this to happen? After all, where was it in the last six months?

Related to that, some financial analysts are wondering if this is indeed the financial world equivalent of a referee's or umpire's "make-up call."
It was "overly aggressive" and "precipitous," said Jules Kroll, whose Kroll Bond Rating Agency has stayed out of the sovereign-debt ratings business. "It's just one more manifestation of lurch-like behavior to try to make up for past sins."
At the same time, this story reminds us S&P wasn't the first ratings agency to downgrade the U.S., just the first of the Big Three. Egan-Jones Ratings Co., a small firm, took similar action last month but on different grounds than S&P.

And, this same article offers further food for thought. S&P wanted to appear "tough on the U.S." after claims it was too tough on Europe:
A "general resentment" of rating firms in Europe may have also played a role, (Daniel Alpert, managing partner of Westwood Capital) said, since some people there regard the firms as "self-righteous Americans who have no business judging" European sovereign debts with as much criticism as they have.

S&P's downgrade of long-term U.S. debt shows it isn't biased in favor of the home country of the ratings firm or its parent, McGraw-Hill, Mr. Alpert said Saturday.

"There's a level of activism at S&P that I haven't seen before," said James Gellert, chief executive of Rapid Ratings, a bond research firm.
Per Chris Mooney, S&P appears to largely be motivated by "pulling a Mooney," more formally known as "motivated reasoning." Appearing tough in Europe's eyes and doing a make-up call are both parts of that.

Fifth, other than repercussions on foreign investment in the U.S., what other fallout does this have? S&P has 18 countries with AAA ratings; it's already made noise about re-evaluating some of them.

I would take a gander the UK is "shakiest" among countries left with AAA ratings, which would lead the Tories toward even more "austerity." In Germany, Free Dems and conservative Christian Dems will push Merkel to get even tougher with Greece to ward off "contagion." Similar may happen in France. That said, it's "interesting" that Greece has no rating right now. And, take note that Italy is down in single-A territory.

I said in a blog post yesterday that "austerity" is at risk of becoming the current world economy's stupid "Smoot-Hawley tariff" response to The Great Recession and its aftermath.

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