S&P Lives Up To Its Name – A Rather Poor Downgrade

Markets are opening shortly for the first time after S&P’s downgrading of U.S. debt. In about 24 hours a number of pundits will have mind numbingly obvious explanations of why the markets did what they did. An increase or decrease in the price of Treasuries, a rise or fall in equities, an increase in interest rates and a fall in equities or vice-versa will all be attributed to either the S&P downgrade, or the indifference of the markets to the S&P downgrade. None of this takes away from one fundamental issue – the S&P downgrade makes little sense. And in reaching this position I am willing to completely discount S&P’s credibility problems given their (and other rating agencies) past performance with mortgage backed securities.

A rating is simply an indicator of the probability of a borrower’s ability to repay their loan. Or as David Beers head of S&P's government debt rating unit said in an interview on Sunday morning on Fox News in the U.S., “What ratings are meant to do is provide a meaningful indicator of credit risk.”

Does anybody seriously think the U.S. will default on its debt obligations? The recent political mess in Washington may make you say, “Maybe.”  But think about it for a second. In spite of a bunch of politically motivated, not so intelligent, partisan, ideologically driven bozos who cannot even be personable to each other running things in Washington, when push came to shove, when they had the opportunity to default, they didn’t. The last month in the U.S. simply shows us that even in terrible economic times, when the political system is quite broken, the U.S. will not default on its debt. So if you are thinking, “Maybe,” think again. The U.S. will not default on its debt. The past month has confirmed that view.

None of this is to suggest that governance in the U.S. is not badly broken and if things don’t get better soon then there is more trouble down the road. But that doesn’t change the fact that S&P is wrong about the U.S.’s credit worthiness. And that is true irrespective of what markets do shortly, and what the pundits say after that.