AA, Bad Or A Pleasant Relief?

SP cut the long-term U.S. credit rating by one notch to AA-plus on concerns about growing budget deficits. We have to remember that Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings on Aug. 2, the day President Obama signed a bill that ended the debt-ceiling impasse that pushed the Treasury to the edge of default. Moody’s and Fitch also said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens. 




The outlook on the new U.S. credit rating is negative, the SP said in its statement, a sign that another downgrade is possible in the next 12 to 18 months.

On Aug. 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings SP had called for as a good "down payment" on fixing America's finances.

This came after a confusing day of reports: Standard and Poor's told the U.S. government early Friday afternoon that it was preparing to downgrade the U.S.'s triple-A credit rating but U.S. officials notified S&P that it had made a $2 trillion mathematical error.

The error was in the calculation of the U.S. debt-to-GDP ratio over time and was based on a misreading of what the correct congressional baseline was, government sources indicated. They said that once informed of the error SP revised its rate-cut rationale to emphasize the political aspects of the country's debt situation.

"A judgment flawed by a $2 trillion error speaks for itself," a Treasury spokesperson said.

U.S. Treasurys, once undisputedly seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany, France or Canada.


MY VIEWS

a) SP does not rule the world, there is still Moody's and Fitch


b) SP can make a $2 trillion calculation error, hmmm, thats why they were so excellent in analysing subprime a few years back


c) Many money market funds cannot touch non AAA papers, and they may have to sell some. Selling Treasuries into cash, but what else can you go into?


d) Have to remember that this affects funds which hold AAA bonds only, there is not a need to sell stocks to cover


e) The move removes a large weight of uncertainty and unknown on the markets. Who doesn't know they should be AA already?




f) Bear in mind that stocks have been down 10 out of 11 trading days, so its not like the last 2 days was a sudden sell down. Plenty of smart players have been selling for 9 straight days. The 9 straight days are to discount something like this eventuating.


g) I expect all equity markets to rise a couple of percents on Monday.


p/s photo: Aum Patcharapa Chaichua