Seeking Alpha
Profile| Send Message| ()  
So, this dysfunctional past-its-prime entity walks into a bar, and tells this other dysfunctional past-its-prime entity that, "hey you’re not AAA, you’re AA+!"
The amount of hype we are going to have to listen to about this is going to be way out of proportion to what actually occurred.
S&P downgraded the U.S. Long Term debt rating by one notch. There is no such thing as AAA-, so this is only a one notch downgrade. S&P also took the rating off negative watch and moved it to outlook negative. An outlook is not as bad as a watch. As far as downgrades go, this was a very minor one. The move means S&P changed its view on the U.S. from being “excellent” to “very strong." It also affirmed the short term rating and took it off watch. Since S&P left the short term rating alone, there should be no impact in the money market space as it relies on short term ratings. The S&P Ratings Definitions are worth a quick read. I still find it mind boggling that they pretend they can differentiate between AA+ and AA and AA- when it often appears they have trouble telling AA from B.
Although the S&P downgraded the U.S. for all practical purposes, the U.S. remains AAA. Most (though not all) funds or indices don’t rely on the lowest rating. They typically use an average rating or a middle rating. The Barclays Benchmark Bond Index Rules take the middle rating of Moody’s, Fitch and S&P. So the U.S. is AAA for all Barclays indices. One of the few things regulators ever did even remotely right in respect of the rating agencies was that they made a big push in the early to mid 2000s to force people to include Fitch and break the duopoly of Moody’s and S&P. For anyone wondering why some of the other rating agencies aren’t listed, it’s because, frankly, the broad market just doesn’t care.
So as you listen to all the noise about how potentially devastating this is, remember, it is only one notch, only the long term debt was affected, the U.S. is off negative watch, and since it was only one of the big three agencies, most institutions will still treat U.S. government debt as AAA rated.
If Japan is any guide, it doesn’t look like there is any impact from downgrades like this one. In the end, for a country that can print its own money (and if there is one thing we are good at, it is printing money) then the rates all come down to the economy and where short term rates are anchored (near zero). Here is the Japanese 10-year bond yield with S&P rating changes. I think my rants have had as much impact on markets as the rating changes seem to have had.
Click to enlarge
Japanese 10 year bond yields with S&P Rating Actions
We can argue over whether the U.S. deserves to be cut or not, but let’s keep that argument in perspective. From a relative perspective, some other AAA entities do seem to be in better shape than the U.S.: Canada, Germany and Finland quickly come to mind. The debt ceiling drama was never going to cause a default, yet the politicians couldn’t stop themselves from talking about the potential that not raising the ceiling could cause a default. If the president of a country goes on air repeatedly and warns that a failure to raise the ceiling could cause a default, and that there was a real risk of failing to raise the ceiling, someone should listen. Fear mongering seems to have become a favorite pastime of the politicians. Well, guess what, there are consequences for fear mongering.
Since we can, and will print money, and the Fed can buy treasuries, the U.S. will never default on its dollar-denominated obligations. Nowhere in the rating agency definitions do they say that a rating takes into account the value of the money used to repay a debt, just whether or not the debt will be repaid. On that basis the U.S. should have been left at AAA in spite of the antics of Washington.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: Don't Worry About U.S. Downgrade