Jul 21, 2011 at 6:37 pm
Standard and Poor’s are seriously workin’ my last good nerve.
According to the WSJ,
“If no deal is struck and the U.S. fails to repay bondholders on maturing debt or misses interest payments, the rating would be moved to default. If the ceiling is raised without a long-term plan to get the U.S. debt load back in balance, S&P might lower the AAA rating to AA+.”
I get the first part and we’d of course deserve the downgrade and worse if we default.
But the second part is maddening. Lemme get this straight: if these credit raters, whose razor-sharp assessments graded toxic mortgage-backed securities as triple-A, don’t think the deficit-reduction plan goes far enough, they’re going to take us down a notch!?
That’s nuts. Even amidst the turmoil of the last few months, markets are still treating US debt as the safest investment out there. And the debt ceiling is a totally manufactured crisis. Once we get it behind us, no one should have any doubt that the US will back its obligations as reliably as it has for hundreds of years.
Whatever deficit package we come up with, we have the institutions, the wealth, the tax collection and market infrastructure to service our debts the same way we always have. This should not even be an issue.
And that’s especially the case given the costs of a downgrade, even one notch to double-A. Investors would automatically seek a risk premium on gov’t debt, and remember, every basis point equals about $1 billion of annual debt service. What’s more, given the amount of global debt benchmarked to US Treasuries, such a careless move by S&P has negative implications for growth throughout the world.
They need to quickly pull a Grover (see update here).
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