As Treasury Continues Childish Sniping At S&P While Losing Credibility, Investors Lose Sleep

Tyler Durden's picture

Today at about 4 pm, the Treasury's John Bellows issued a hastily written statement, in which he explained why in his view, a day after a historic downgrade of its debt, the $2 trillion mistake that S&P made "raises fundamental questions about the credibility and integrity of S&P’s ratings action." What is ironic is that in the explanation, it is the Treasury's own credibility that is put at stake. Supposedly the reason for the mix up is as follows: "S&P incorrectly added that same $2.1 trillion in deficit reduction to an entirely different “baseline” where discretionary funding levels grow with nominal GDP over the next 10 years. Relative to this alternative “baseline,” the Budget Control Act will save more than $4 trillion over ten years – or over $2 trillion more than S&P calculated. (The baseline in which discretionary spending grows with nominal GDP is substantially higher because CBO assumes that nominal GDP grows by just under 5 percent a year on average, while inflation is around 2.5 percent a year on average." So let's get this straight: the Treasury department is kicking and screaming at S&P for daring to downgrade the US, when it is using as its baseline a forecast prepared by the same CBO which back in 2001 predicted a net negative debt balance by 2008 (!), and which in the same year expected 2011 US GDP to be $16.9 trillion, and a budget surplus of about $1 trillion, putting any S&P forecast from the peak of the credit bubble, to shame, but far more importantly, Bellows, and his plethora of bosses, is pissed that the S&P did not use a baseline that assumes a 5% GDP annual growth, when current annualized GDP, 2 years after the end of the recession, is under 2%? And this is what is supposed to make S&P less than credible? This is like the pot and the kettle having commenced global thermonuclear warfare.

As to what the end result of all this childish sniping most likely is, here is someone with far more credibility: Stone McCarthy. "Will the downgrade serve as a wake-up call to policymakers to step up their efforts on deficit reduction? We're not hopeful based on the initial reactions we've seen. We haven't seen any official press release from the White House or the Treasury, but most of the press quotes of Administration officials we've seen amount to sniping at Standard and Poor's or efforts to undermine the rating agency's credibility...We don't think the implications of the downgrade for investors and markets are necessarily clear-cut and straightforward. Symbolically, the downgrade could be negative for U.S. financial markets, including the foreign exchange market, especially at a time when markets and the economy are fragile." Translation: the market will promptly throw up at the rankly amateur response so far exhibited by the treasury which should be focusing on damage control such as exhibiting real deficit cutting measures instead of proving to the public what legendary excel goalseek experts it has on staff...

And speaking of Stone McCarathy, here is their complete outlook on why it may be a good idea to stay on the sidelines next week:

Will the downgrade serve as a wake-up call to policymakers to step up their efforts on deficit reduction?

 

We're not hopeful based on the initial reactions we've seen. We haven't seen any official press release from the White House or the Treasury, but most of the press quotes of Administration officials we've seen amount to sniping at Standard and Poor's or efforts to undermine the rating agency's credibility.

 

According to many news outlets, a Treasury official said ""A judgment flawed by a $2 trillion error speaks for itself," referring to an error in S&P's calculations. We're not exactly sure what the error was, but it looks as though Standard and Poor's assumed discretionary spending over some time frame that was $2.0 trillion more than a CBO baseline scenario. S&P's conceded the error, saying that it changed its forecast that the debt-to-GDP ratio in 2021 would be 85% instead of 93%. And that wasn't enough to prevent a downgrade.

 

Certainly, S&P's and the other rating agencies have credibility issues following the meltdown in the private label MBS market. And a $2 trillion error doesn't help S&P's on the credibility front. But it's hard to argue with S&P's bottom line: The recent debt ceiling/deficit reduction deal didn't go far enough, didn't address revenues or tackle the huge fiscal challenge of entitlement spending. And based on the political wrangling we've observed over the past several months, there isn't much reason to hope that the two parties can come together to tackle the big problems.

 

Following S&P's announcement, House Speaker Boehner issued this fairly partisan statement:

 

"Republicans have listened to the voices of the American people and worked to bring the spending binge to a halt...Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground...It is my hope this wake-up call will convince Washington Democrats that they can no longer afford to tinker around the edges of our long-term debt problem."

 

The statement from Senate Majority Leader Reid was a little less partisan.

 

"The action by S&P reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures like closing taxpayer-funded giveaways to billionaires, oil companies and corporate jet owners. This makes the work of the joint committee all the more important, and shows why leaders should appoint members who will approach the committee's work with an open mind - instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S&P are demanding."

 

Around August 16, Congressional leaders from both parties will have to name 12 members to the new joint committee charged by last week's legislative deal to find $1.5 trillion in deficit reduction over the next 10 years. From what we've heard and read so far -- contrary to Reid's statement -- leaders are looking to name hardliners to the committee. In other words, Republicans will name members who won't budge on revenues and Democrats will name members who won't give much ground on entitlements. Members of the Gang of Six need not apply. Whether the S&P action has much of an impact on the policy process going forward could become apparent when the members to the new joint committee are named.

 

The market implications of the downgrade are difficult to predict, and unfortunately our knowledge of the more practical consequences of a downgrade is pretty limited.

 

It probably makes some difference that the other two major ratings agencies have left their long-term U.S. sovereign rating unchanged for now.

Moody's appeared to give policymakers a little more credit for what was agreed to in last week's deal and also seems willing to give Washington more time to take further action. Moody's issued this statement after the deal to lift the debt ceiling was reached:

 

"In confirming the Aaa rating, Moody's also recognized that today's agreement is a first step toward achieving the long-term fiscal consolidation needed to maintain the US government debt metrics within Aaa parameters over the long run...

 

"In assigning a negative outlook to the rating, Moody's indicated, however, that there would be a risk of downgrade if (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the US government's funding costs over and above what is currently expected."

 

Fitch Ratings, meanwhile, said policymakers need to go further than last week's deal when it comes to deficit reduction, but seems to have more faith in the political process, certainly compared to Standard and Poor's:

 

"The increase in the debt ceiling and agreement on the broad parameters of a deficit-reduction plan support Fitch's judgment that, despite the intensity and theatre of political discourse in the United States, there is the political will and capacity to ultimately do the right thing. In Fitch's opinion, the agreement is an important first step but not the end of the process towards putting in place a credible plan to reduce the budget deficit to a level that would secure the United States' 'AAA' status over the medium-term.

 

"Nonetheless, at a time of heightened concerns regarding the creditworthiness of sovereign governments in mature industrialized economies, it is essential that a credible multi-year deficit reduction plan is articulated and implemented On current trends Fitch projects that U.S. government debt, including debt incurred by state and local governments as well as the federal government, will reach 100% of GDP by the end of 2012, and will continue to rise over the medium term - a profile that is not consistent with the United States retaining its 'AAA' sovereign rating."

 

We don't know to what extent investors may be required to sell Treasury securities based on a downgrade from one ratings agency, or how the downgrade might affect the status of Treasuries as collateral in things like repo transactions. We think that investor covenants related to credit ratings may be different for corporate bonds than they are for government debt. For bank capital purposes, for instance, our understanding is that the zero risk-weight attached to Treasuries isn't based on a particular credit rating.

 

In sum, we don't think the implications of the downgrade for investors and markets are necessarily clear-cut and straightforward. Symbolically, the downgrade could be negative for U.S. financial markets, including the foreign exchange market, especially at a time when markets and the economy are fragile. On the other hand, despite all of our problems, U.S. markets may still be regarded as a safe haven, given the problems in Europe.

 

Standard and Poor's said it will issue separate releases on Monday regarding "affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors."

 

Among other things, we expect that S&P's will be lowering the ratings for the GSEs and certain municipalities, whose AAA ratings have been a function of its relationship with the federal government.

Open of FX on Sunday should be once again quite amusing.

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mendigo's picture

cool artical about this in (sorry) NY Times - re. S&P response

the us is not in danger of defaulting - the us has defaulted

it is printing money to buy it's own debt is that the action of a solvent country?

the us has gone banana republic (lo siento mis amigos)

WestVillageIdiot's picture

You are wrong.  You don't know what you are talking about.  I am sure of that.  You see, I have discussed these topics with my friend that works at Moody's and he always tells me, in a very condescending way, that I don't know what I'm talking about when I say things like you are saying.

Oh yeah, and he hates gold, thinking it is just silly to buy it.  I bet you feel stupid now. 

Long-John-Silver's picture

Gold; that barbarous relic that became the worlds reserve currency yesterday that they can't quite come to terms with, yet.  

Irish66's picture

The BS is so deep, no shovel will save us

Aragorn's picture

we're doing fine...keep shoveling

V10's picture

Too Deep To Shovel

Taku's picture

NOT using 5% baseline?

Yeah, right. Err..I know about 100 financial sales 'analysts' that have investment vehicles that assume baseline 8% yoy for about a decade. These 'bosses' wanna walk the walk?

Irish66's picture

We have "shovel ready projects"

Goldilocks's picture

Here & in the now… some of the public figures we see & hear are guilty as sin. (still ?!?).  The “enemy within the gates” is so much more heinous than what we may have imagined. It is abominable the MSM treat them like superstars. Disgusting … Blah, spit, puke :-(

“This is the illuminati / satanic movement in this country today.”
“Right up to the White House.”
-Ted Gunderson

Watch [pay homage to] the following Ted Gunderson [an Ex-FBI guy] videos…

Ted Gunderson - The Great Conspiracy Exposed 1_7 PL
http://www.youtube.com/watch?v=PZ4ws6jTiqk&feature=related

Ted Gunderson - The Great Conspiracy Exposed 2_7 PL
http://www.youtube.com/watch?v=BN_uiOxlM54&feature=related

Ted Gunderson - The Great Conspiracy Exposed 3_7 PL
http://www.youtube.com/watch?v=JXb_XtMoIgU&feature=related

Ted Gunderson - The Great Conspiracy Exposed 4_7 PL
http://www.youtube.com/watch?v=EwMun94Nvo4&feature=related

Ted Gunderson - The Great Conspiracy Exposed 5_7 PL
http://www.youtube.com/watch?v=-2sT3e1cjwU&feature=related

Ted Gunderson - The Great Conspiracy Exposed 6_7 PL
http://www.youtube.com/watch?v=1UuWW5xRg_U&feature=related

Ted Gunderson - The Great Conspiracy Exposed 7_7 PL
http://www.youtube.com/watch?v=i2gknj6yy6s&feature=related

Edward Fiatski's picture

You have to realise the 'Illuminati' have founded the United States of America and have been in control ever since; the path America takes is the road they've paved for it.

The current series of engineered crises, both sovereign debt & currency, have a final goal in common: destruction of the Constitutional REPUBLIC of the United States of America. You will get a North American Union in its place.

Question is, though: is there going to be a second Civil War, a World War 3, perhaps, to facilitate the transition for the aforementioned scheme. :-)

falak pema's picture

why should the founding fathers who made the country want to seed it from inception to destroy it as they are supposedly still in charge? 

What sort of perverted logic makes you stick you head u know where to say such things? Do you kill your own child knowingly? 

Edward Fiatski's picture

The Founding Fathers knew America would not survive in its on-paper concept state; what you fail to realise is that America is 'just' another country, being the host of operations for the 'Founding Fathers'.

If you don't know the final goal of the game by now, then you won't see a thermonuclear World War coming.

WestVillageIdiot's picture

I look forward to our meeting at work on Monday.  I fear that i am going to really fly off the handle when this topic comes up.  The mindless drones that surround me are sure to be of the opinion that this is an unfair, and dangerous, move by S&P.  They will gnash their teeth at the thought of any reality entering into the financial world.  It will take all of the self-discipline I have to not stoop to, "why don't you just shut your fucking mouth for once and quit boring us with your endless bullshit?"  That will be a challenge.

I noticed this morning that the premium on physical gold had shot up.  What has been going for $42 over spot, as recently as Friday, is listed at $62  over spot right now.  I didn't know why this had happened.  Then I thought that maybe it should have gone up more when I started reading these articles.

The big story here is not the downgrade.  The big story here is that the truth is slipping into the market, whether intentional or not.  That is why I think this will be so destructive to the markets.  These markets, like Tom Cruise, can't handle the truth.  Once the truth starts entering the picture it is going to be hard to stop it.  That should be the fear.  

Goldilocks's picture

Market volatility. Mmm Mmmm Good.

Technotronic - Pump Up The Jam
http://www.youtube.com/watch?v=9EcjWd-O4jI
(sorry about that horned bitch Lady Garbage ad frame)
(if “it” hurts your eyes, adjust the width of the browser)
(Froggoroth commented, “This video sets off my epilepsy.” ;-)

Have a great weekend ya’ll ;-)

Everyman's picture

WELL SAID!!!  The "truth" has not been around the markets for about 2.5 years, and you are correct.  It amazes me that economic and financial types "don't get it" and somebody like me, an arm chair economist and investor can pick on this brutally obvious line of BS.

When this starts it wil be the SHTF moment, and there will be violent retribution, mark my words.  These idiots keep going on  and on on how great the economy is and the "recovery" yet there has never been none.

These "geniuses" all think the "market" is the "economy, yet will tell you that exact think to justify their over exuberant position.  Mindless and soulless.

StychoKiller's picture

US Treasury response:  "The USA is NOT as pregnant as the S&P sez it is!"  Guess the US Govt doesn't know what ZERO CREDIBILITY means!

espirit's picture

Have been wondering where the Treasurys "other pocket" containing that $$2 Trillion was located. 

Still not sure whether unpatriated multinational profits, SS, medicare, federal and private 401(k) retirement funds, or undisclosed assets might be part of the mix (pockets).

Wash, rinse, shake out the loose change - Bitchez.

espirit's picture

The more I hear, the more I hear "political posturing". Bah!

Rome is burning, and the political idiots are playing king of the hill.

Recall them all!

km4's picture

The big story here is not the downgrade.  The big story here is that the truth is slipping into the market, whether intentional or not.  That is why I think this will be so destructive to the markets.  These markets, like Tom Cruise, can't handle the truth.  Once the truth starts entering the picture it is going to be hard to stop it.  That should be the fear.

You nailed it !

Spitzer's picture

Physical premiums are up...Good observation. I was looking for a gauge today, never though of that.

Galen Slade's picture

 

Amusing in a "feed the Christians to the Lions" kind of way.  I don't feel too bad, I went short the market with a couple positions just before the close Friday, figuring there would be some sort of bad news over the weekend leading up to Bernake in Jackson Hole II.   Should have bet the farm - I probably would have been able to retire to somewhere nice, like Lithuania, by Monday afternoon....

fuu's picture

They have 13.4 Mbps internet speeds there.

Everyman's picture

I wish these "economic assholes" would stop worrying about the God Damn MARKET and START worrying about the GOD DAMN ECONOMY!!!!!

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

To paraphrase Sir Winston Churchill, "this is not the end of the U. S. as a sovereign nation, it is not even the beginning of the end, but it "is" the end of the beginning."

 

For we silver buyers tomorrow night and next week may offer one last opportunity to get silver for under $40 per ounce!?  Silver, still largely perceived by most of the braindead masses as only an industrial metal combined with interest rates set to go up, at least a short term negative price environment "may" rear itself beginning at 5 PM CST this Sunday night?  Be prepared!

Tuco Benedicto Pacifico Juan Maria Ramirez

pan's picture

It's a downgrade we can believe in, bitchez!

oogs66's picture

This guy get the short straw? Timmay too busy to write? Our government is a joke.

MarketTruth's picture

Timma has ZERO credibility in the USA, Asia, Europe, etc. As such, the USA props up the next puppet monkey (who will eventually be spanked down and so puppet monkey #3 will enter the scene). Wash, rinse, repeat.

lolmao500's picture

Who cares if the markets don't factor in the SP downgrade... what's really important is the situation in Europe. If Italy goes down, Europe goes down and if it goes down, the world goes down.

Not to mention, Fitch is finishing their credit analysis of the US and will probably downgrade the US by the end of the month. Also, next up for downgrade, probably this week or next week : FRANCE... and if France goes down, Europe goes down...

putbuyer's picture

Anyone looking at FSG? - ETF long gold and short S&P. Very interesting

http://finance.yahoo.com/q?s=FSG

Via The Daily Crux - http://www.thedailycrux.com/content/8328/ETFs

Long-John-Silver's picture

That light you think is the end of the tunnel is actually a flash crash in progress.

reefermadness's picture

I'm scared the sky is falling. ZH told me so. Get some sleep for gods sake...

Cocopele's picture

Or....... there is this perspective from Martin Armstrong

 

http://www.martinarmstrong.org/files/Standard%20and%20Poors%20Downgrade%...

 

reefermadness's picture

Exactly if anyone should be losing sleep its the dumbshits at the S&P.

Re-Discovery's picture

Ok, I'll bite.  Armstrong has a point.

One day later . . . and I'm skeptical.

Skeptical of the trading Thursday and Friday.  Skeptical of the Downgrade.  Skepitcal of the instant analysis.

There may be an equity selloff Monday probably will.   But I see a viscious rally after the spin doctors get to work.

This thing just wont be allowed to go down, because money is a lot of things.  Including Laws, corrupted or not.  Including Government authority, corrupted or not. 

PMs will do well, dont get me wrong.  But an instant systemic collapse is going to be really hard to materialize.

For one, everybody expects one.  Where are they going to go?  Cash?  OK for how long?  Gold and Treasuries is my guess.  But for how long?  Big stable equities?  How long.

Bread and Circus will once again be the order of the day.  The slave pshycology does not lose its grip just because one rating agency finally does what they should do.

Rome was not built in a day.  And neither did it collapse in one.

 

falak pema's picture

So to summarise your skepticisim : go long decline of new roman empire...?

Spastica Rex's picture

The CCCP came apart pretty quickly.

radish juice's picture

Well treasury is going through expected emotions on the downgrade. First they were in denial, now they are expressing anger, we need to wait until they enter acceptance phase, who know how long it will last though because they were in denial for a long time. Sooner they reach acceptance better of all of us will be. On Timmy's credibility, its a topic of discussion for another day...

gwar5's picture

.

 

For Whom the Downgrade Tolls....

Maybe an Affirmative Action intervention can help Geithner and Doh-Bama excuse their fantasy economics and lower the official standards for them, just this once, or something. 

MrBinkeyWhat's picture

TP (Treasury paper) is NOT Toilet Paper. Repeat, wash, repeat. TFN.

That is official.

gwar5's picture

.

 

For Whom the Downgrade Tolls....

Maybe an Affirmative Action intervention can help Geithner and Doh-Bama excuse their fantasy economics and lower the official standards for them, just this once, or something. 

WestVillageIdiot's picture

Wow, could that Martin Armstrong article be a bigger piece of shit? 

gwar5's picture

.

 

These clucks all knew the downgrade was coming and that's why it was dumped on a Friday.

Those fantasy growth numbers were well known and baked into the cake a long time ago -- so does this mean real numbers are going to matter from now on? 

The Hurt Stick has a ways to go. How about fake assumptions for tax revenues? How about fake assumptions for savings from Obamacare? How about those fake BLS and inflation numbers?

All rosy scenario lies.

 

Ponzi Unit's picture

Geithner called the hapless fuck from the yacht -- or the tenth tee -- and ordered him to issue what became a hollow attempt at plausibility, one that can only make things worse. 

And now the German refusal. Monday should be interesting. The Hamptons could be empty by Wednesday.

Spitzer's picture

I heard that Geithner only has like a 2.5 million dollar net worth.

pods's picture

Reminds me of the scene in Dumb and Dumber when Lloyd and Harry are arguing:

"You can't triple stamp a double stamp."

I mean, this is all just BS to begin with.  One bullshitter (S&P) called bullshit on another one(US GOV).

These guys all lie for a living, and get handsomely paid for it.

pods

 

alexwest's picture

cant believe fuckign liars on both sides

here's treasury man answer. did anybody read one ? i did..

http://www.treasury.gov/connect/blog/Pages/Just-the-Facts-SPs-2-Trillion...

there's chart based on S/P data that ratio GDP/NET DEBT OF FEDERAL/STATE/LOCAL is only under 80% in 2011..

who is fuckign kidding whom??? does those people from s%p/treasury completely lost minds?

gdp is ~14 trln (and in reality is much lower), official debt is 14+ trln.. how is is possible to have ratio less 100%? and state/local debt is not included..

fuckers... seems 1 small crook (s/p) jsut crossed bigger crook, and one is bitching...

alx