It is quite likely that we will see some interesting market action come Sunday night as this news is digested. But I will stick my neck out and say that once the dust settles a bit the ratings drop is not going to have a significant effect. (for now)
It looks as if the US is going to have a split rating. (AAA {equivalent} by Fitch/Moody’s and AA+ by S&P) If this were a high-grade corporate credit the split rating status would make no difference in how the underlying bonds trade. I doubt that the S&P action will have a different (lasting) consequence.
What was S&P thinking when they pushed this on August 5th? Have they no sense of timing at all? We have just gone through the most gut wrenching market week in three years. This action could be very upsetting to global capital market conditions. While I think that is not going to be the case there certainly is risk for things to become unglued for a bit.
While I don’t fault S&P for their action (they said they would do this on April 18th) I think they made a big mistake with bringing public last Friday. For this, I would give S&P a single D rating.
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending is less likely than we previously assumed and will remain a contentious and fitful process.
My read of this is that they are blaming the politicians. As well they should. I hope that this is the message that comes to the public. It’s the idiots in D.C. that did this to us. They could not come to a compromise when the Nation required that they do so. The “Deciders” let us down. The economy will pay a price for what has happened. I truly hope that some of those Deciders pay a big price too. I think they will.
All of the big hitters in Washington have egg on their face today. But the one with the most egg is Tim Geithner. He said that a downgrade would not happen. It has. I think Geithner will have to go as a result. I think his “resignation” announcement will come before September 1st.
Last night the Fed gave the S&P action a “We don’t care” response. There will be no change in how the Fed adjusts collateral requirements. There will be no change in their calculations of risked based capital for financial institutions.
It’s predictable that the Fed would take this position. What else could they do but ignore the downgrade? A key question is how central banks outside the US look at US collateral. Will any of them change the haircuts on US paper? I doubt it. But if I’m wrong and we see the Bank of Canada, England or ECB do anything regarding collateral ratios there will be hell to pay. That’s the best reason why they won’t do anything.
The Chinese downgraded the US some time ago. They don’t think so much of our paper. Russia is a big holder too. I would expect that we see evidence in the coming months that these two are going to be lowering their holdings. I don’t expect to see some big headline that says, “China to sell”. That’s not going to happen. The critical issue is, "Will they buy more?" I doubt they will.
The Russians must be jumping for joy at this. As this plays out we will see very clearly who are friends and who are not. On this issue, these two are not our friends. Yet they hold a total of $1.5 trillion of our paper.
S&P lists the entities related to the US that will have their ratings dropped. Fannie, Freddie and Ginnie Mae have been cut. Together that is about $6 Trillion worth of paper.
S&P has said that the ratings change for the US does not impact corporate ratings. But the states and cities are another matter. To me it's just nutty to think that the city of Syracuse is a AAA and the federal government is worth less than that. No doubt but that Muni downgrades will be forthcoming. This should have happened years ago.
If I was a rating Agency I would look at the policies of the government as a whole when setting a rating. Clearly the federal government is running up too much debt and S&P has said, “No mas”. The rating agencies want to see saner and more sustainable policies from D.C. They do not want to see kick the can down the road stuff.
There is no greater “kick the can” policies than those of the Federal Reserve. They have cut interest rates to zero. A desperation policy that is leading to big distortions in the basic funding markets today. They have bought Trillions of government paper. They have facilitated the expansion of US debt. They are part of the problem when it comes to long-term fiscal sustainability.
If the Fed announces another LASP (QE3) I now anticipate that the rating agencies will react negatively. More QE = More downgrade. I hope Bernanke and his cohorts get this message. Their hands are now tied at so many levels. They are pushing their own limits on inflation targets. They know that ZIRP is a failure. They understand that QE (LSAP) has only marginal benefits (at best) and they also understand (and have acknowledged) that additional QE efforts now come with more risk than reward.
It would have been helpful if the S&P had provided some thinking on this critical issue. S&P was willing to take on the entire legislative part of government. But they didn't have the balls to take on the Fed. Interesting.
i think they did it because the fed told them to do it. they are letting the air out of the bag slowly. all of these organizations are run and controlled be same people. i mean come on. does anyone at this stage think that for one second anyone in new york is not controlled and surely is not independent. we are talking about high stakes here ladies and gentlemen. the kind of situation in that if you make the wrong move without permission, you may find yourself floating in the hudson river......
I absolutely agree! S&P, Moody's, & Fitch lost all credibility a few years ago for me when it was revealed they were very much part of the credit crisis. While it is possible that S&P decided it needed to correct this credibility problem and actually stood up against the government, I remain a skeptic. This implies that everything about it, including the timing decried by Bruce and others, is actually part of the plan - which is probably the Fed creating the political pressure to raise taxes.
A few more weeks like this past one, and people will be begging for higher taxes...
Only Schmoos (or is that Schmoes?) would beg for higher taxes. Rational people should be demanding a shrinking Govt!
Should have written 'sheeple' there - I sure as hell don't want them
The timing is beyond stupid, how utterly incompetent can these people be? They somehow have a total monopoly on proceedings yet are responsible for ensuring the biggest fuck up known to finance, i dont get it, i just cant reconcile why they still have this power. Are sovereign’s so incapable of doing they’re own due diligence that we need to concentrate this amount of power into an agency that is OBVIOUSLY FUCKING INCOMPETENT. Someone is not putting together the pieces here, how can they consistently, without fail, jump in at the very worst moment conceivable? Its as if they WAIT for the worst time to strike...its as if they want to create instability, there is said it, I suppose im fucking nuts now too.
As for it being leaked, please, it’s a joke, does anyone even know who these people are? Like some coked-up Phd or secretary cant be blackmailed or ploughed with petty cash...anyone is open to try, i dare say plenty have suceeded.
The rating agencies are there to simply push the remaining sheeple out of the market, so that their puppet masters, who are sitting on cash, can come back in and own it all.
When you see the insider selling to buying ratio flip, that will be your signal to come back.
Speaking of municipal debt, maybe Meridith Whitney's prediction on municipal defaults is about to come true.
Anyone notice Panetta's propaganda speech about not cutting the military (which of course is the enforcement arm of the banking cartel).? So the Wall Street captured commission will reduce entitlements rather than cut military spending. Plus more taxes to destroy small business and the middle class. You will note that the 12 members will be those that have forever been recipients of Wall St largesse. No Bernie Sanders, Ron Paul or Michelle Bachman need apply. It was the end game from the beginning.
Bingo! We have a winner. Panetta said " we cannot possibly cut $28 billion without seriously endangering the security of the US". Those words constitute treason IMO. 28,000 troops in Korea, hello? The US needs new jobs, bridges, ports, highways...The US taxpayer is building new bridges, roads, and hospitals already...the problem is they are in Iraq! Somebody needs to give the Pentagon the GPS coordinates for Cleveland and tell them to get to work.
Thanks for the sanity Bruce. I love your perspective because you seem to have the gift of observing from outside, like looking through the window. You have a traders mind.
Thanks for sharing your thoughts.
Inintial Chinese and Russian response to the downgrade..........
It is funny how the chicoms are acting.........it is our jobs, technology and money..........they would be nothing without America......
http://nakedempire2.blogspot.com/
Of course, any Russian or Chinese hostility is not exacerbated by US encirclement, first-strike enabling missile "shield", or military invasions and occupations of neighboring countries, much less by the deliberate depreciation of US-owed debt.
sarcasm intended.
That's not true!
We're trying to extend the hand of friendship and democracy through the barrel of a gun.
Let's talk about the elephant in the room...who/what is the biggest consumer of wealth from the US? Drum roll please.....Offense (excuse me...Defense).
I am still of the opinion that the Timmah should just mint up some trillion dollar coins...hava a parade down to the NYFRB and pay off the debt. Simple...done...Mojita time now.
FYI comrades...I just got my 100 Trillion Zim note in the mail from e-bay. I am going to start printing my own. Feeling richer than the Bernanke. WOOTY WOOT!
"Of course the real irony in all of this is that the analyst who pressed the button on the downgrade of the United States of America is a Canadian based in Toronto"
I say invade Canada. Manitoba is lovely in fall and all those natural resources would help us pay our debt. Best of all, we can inflict our healthcare system on them and make a profit.
Canada has few if any major economic problems to deal with (45 billion deficit now to become a 2 billion surplus in 2015 "projected"). It is fitting then that the fiscally responsible spank those who aren't. They have that nasty communist health care system too which from all my soundings finds the biggest complaint is they have to wait longer for non emergency surgeries. We Americans would never stand for such a thing.
http://www.financialpost.com/Canada+deficit+shrinks+December/4347396/sto...
Ya, they have no major economic problems other than a massive housing bubble that will be bursting soon (that sure worked well here) and an entire economy dependent now on selling oil.
Run the CMHC liability through the S&P model and tell me that Canada should be AAA.
So how do I invest in Canada's economy? There must be a fund for that somewhere.
So how do I invest in Canada?
Go long baby seal club manufacturers.
SnP huh... maybe its time to go to war with syria, or is it bad enough that we should go after iran
.
since were all dead anyways
oddly enough the state dept is advising all US citizens in Syria to pull up stakes and get the hell out of dodge...
marcusfenix,
@11:09
Reason why is Israel is going to attack Iran, end of summer,early fall likely Sept.
Want to clear out the fields for the blood to flow.You know Syria will come after the Izzy's...........and we know it now.
YES, amazing they are going gang RAPE the two programs most elderly require, in lieu of cutting the size of Govt,ormthe military.
SP/Moody's, should require them to GUT the Federal Govt first, and than attack the lifeblood of millions of real producers,and life savers,the one's that paid in should get theirs,but at the rate we have gone,we're all screwed either way.................shame, shame, shame.
Sorry bastds deserve a noose.
Then again, not really so much.IF they screw the savers YET again, this would just cement my mind to going the Expat route, now ,rather than later.
I'll be damned if I let them screw me out of my lifes savings, and if they steal our SS/MC, then NOTHING is sacred.
Stick a fork in this bitch it's done..............
They stole your social security years ago. It wasn't intended to be your retirement, it was intended to be just another source of tax revenue for the general fund...and that's all it is.
And so ends the Age of Debt and so begins the Age of Austerity. The next Age is the Dark Ages.
http://themeanoldinvestor.blogspot.com/2010/05/after-crash.html
The Russians have been dramatically reducing their treasury holdings throughout this year.
Time to end ZIRP. It is killing the prudent. Fuck Geithner, fuck Bernake. Obama should have summoned both of them into the Oval Office and said, "You're fired."
Are you trying to imply that an affirmative action, community activist president whose parents were both wingnut marxists has any real clue as to what is actually going on?
Bruce, I liked the piece. I do not have a problem with S and P's timing. In fact, many of us think it was long over due and it's not like the rating agencies haven't been compromised in the past. http://thecivillibertarian.blogspot.com/2011/08/standard-and-poors-claim...
One last thing on motivation and timing...screw that. Quite simply, there would never have been a "good" or appropriate time to do this. In fact had S and P wauted, people like Yves would have screamed louder claiming it was done in an election year. Tough shit. The bottom line is that the worst President and Congress ever had an opportunity to do the right thing and they failed. Cry me a river.
I agree, S&P's job isn't saving or propping the market. They said what needed to be done to satisfy them and the results weren't even close to the mark. Any blame for adverse effects fall on DC not S&P.
I think Bruce is underestimating the problem with Russia and China. He's correct in emphasizing that they are NOT our friends but his outlook is clouded by a normalcy bias. The rulers of the Middle Kingdom think it's their right and destiny to be the leaders of the world and with typical Chinese determination have been positioning themselves for the top dog position. Right now they see the alpha dog reeling from it's problems and they have just been given a completely legit excuse to act. Will they? It's beyond my pay grade to figure out if they are in position to make a move on the reserve currency position but perhaps in partnership with Russia they think they can pull it off. After the Chinese tank treasuries by selling their positions a Chinese/Russian asset backed Ruan would look very attractive. There is absolute certainty they will be examining the possibilities.
Not a chance.
Bad as we are, who in their right mind will want to trade FRN's for some combination of Rubles and Yuan/Renminbi?
Plus, the old saying that 'when the USA sneezes, the rest of the world catches a cold' is still true to larger sense than most understand. China is still far from reaching 'critaical mass' when it comes to having a sustainable society absent a huge export market....the biggest of which is America, with Europe being #2.
Or maybe you would prefer to use some combination oil backed currency. Given the domiance of hostile oil producing countries, that should really make the West, where most of the world's wealth is located, real comfortable.
Bottom line, as most here realize, we are truly in a very bad place, and very quickly running out of time. However, expecting salvation to come from BRIC or MENA, or really anyplace else, is just dreaming. US & Europe go down, the rest of the world will have one hell of a lot of sorting out to do.
This downgrade should've happened in 2003.
In Defense Of S&P's Downgrade...by Henry Blodget
http://goo.gl/7F3O8
But there's one thing that S&P should not be criticized for:
Pointing out that the USA's federal budget outlook has gone from sustainable to unsustainable in the past decade and that the USA's government appears to be unable or unwilling to face this fact and deal with it.
There is no way the USA can fix its finances without a reasonable increase in taxes. There is no way the USA can fix its finances without significant spending cuts. And there is no way the US should be slashing spending OR radically increasing taxes right now, with the job market as weak as it is.
But the US government seems unwilling or unable to face any of those facts.
Bruce,
Excellent article. Whenever I want to sort a topic out in my head, I come and see if you have posted something on it. I may vehemently disagree on a rare occasion but even then your thoughts have helped me sort through it.
I think S&P steered clear of the Fed becaause they had named the source of the problem - Washington's politicians. Bernanke did not appoint or re-appoint himself.
I expect Russia to be the first sovereign power to use this opportunity to say "We are dumping our what we have. We will not be buying more. Tvoyu mat!"
One of the market axioms I have learned to respect, "Credit always wins."
barliman
Barliman
I too enjoy very much the articles of Bruce.
I didn't get what it is that you don't agree on
Me myself I don't agree, that the timing was bad chosen by S&P
It was obvious, they warned in April, they warned another couple of times.
Finally on the last day the debt limit was lifted. S&P analysed the how
and then waited until the weekend after markets close to give their verdict.
S&P had the guts. Moodys and Fitch kept on brownnosing.
Now Government, Fed and everyone else has time to think and comment and cool down for 2 days.
so much for the Russians
Russian Deputy Finance Minister Sergei Storchak said Saturday.
"We will not review it, because there is not much difference between AAA and AA+," Storchak was quoted by Interfax news agency as saying.
Fishface, I agree. The timing might have been just right to counter the bad congressional move (although I might be a tad optimistic).
At least one of the services had to make a move or lose the little credibility they had left. S&P just drew the short straw, that's all. There could not have been more than one change its rating anyhow since the blowback would have been phenomenal. No biggie.
dltd.ble.
"The Russians must be jumping for joy at this. As this plays out we will see very clearly who are friends and who are not. On this issue, these two are not our friends. Yet they hold a total of $1.5 trillion of our paper."
When the US HFs started burning the EU member countries, it was in essence US HFs who were doing this, did anyone in Washington, NY or WS ask themselves who were "their friends in EU"...? No they said "This is how the market works"...And told the ECB and sovereigns in EU "put your house in order, you stink".
Double value systems? Its the same market, global, with the same whistle blowers, those that work for the largest nation on earth; now in the financial dock with the dunce cap on. So, wonder what the Greeks and Italians are saying about their "good friends" the Americans, and their casino HF who love to leverage their power plays.
The Chinese are frowning PRECISELY because they hold $1.5 trillion of US paper, and its going down the shute every time BB turns the QeE tap on, like it is feared he will next week, and every time the Congress vetoes tax reforms. The same medicine that the world screams about to the sovereigns for not applying it to their own economies in the EU...
Long live friendship that has the same size of shoe on each foot!
Good read
Yves over at Naked Cap is in a fury over what she implies is a bogus downgrade motivated by politics. It would seem that Yves has bought into the the MSM meme that is being widely propagated by the usual suspects. It's all hands on deck to protect the reputation of the president and separate him from this disaster.
Will S&P Downgrade Be Another Y2K Scare?
meanwhile Obama was being seranaded at his Birthday bash here is the video of Jennifer Hudson singing "happy birthday Mr. President .." for Barack.
___________________________________________
Of course the real irony in all of this is that the analyst who pressed the button on the downgrade of the United States of America is a Canadian based in Toronto.
Primary Credit Analyst:
Nikola G Swann, CFA, FRM, Toronto (1) 416-507-xxx ; xxx@standardandpoors.com
(good luck crossing the border next week Nik)
( the PDF of the S&P report)
______________________
and from 2009 this Bloomberg OpEd by that same analyst:
by Nikola G Swann
June 15, 2009
S&P Ratings: Why the U.S. Government Is Still Rated AAA
___________
Leo, you probably know this guy
Nikola Swann is a Director, having joined the Toronto office in 2002. Nikola is primary analyst for the United States of America, Canada and Bermuda, as well as several public sector entities, including the International Bank for Reconstruction and Development, the International Finance Corporation, and la Caisse de dépôt et placement du Québec.
Prior to joining Standard & Poor’s, Nikola worked as an Economist in the Canadian Federal Government’s Department of Finance. Previously, he worked in the Monetary and Financial Analysis Department of the Bank of Canada.
This article and its author are both POS.
Raising the US debt level and further looting Social security and Medicare have very little to do with addressing and solving the real US problems!
The author blames the hard-working Americans who all their lives contributed to the Social Security for the America economic ills. It is just fking disgusting. It is American politicians and the US government who looted the Social Security. The endless US wars all over world cost zillions of US$$$$ and are bankrupting the USA.
She bought into that a long time ago.
It just looks like she didn't. She is merely "useful opposition".
Thank u for clearing that up for me, Lord W. btw, you seem to be one of those ZHers who have figured out how to block the green light|red light ratings arrows. I wanted to give you one, but I guess rank has its privileges. don’t tell RobotTrader or his mom.
lol, those stinking Canuks! Blame it always on Carthage!