Today's Irony: S&P's Opinion on Sovereign Debt

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US Equity and Bond investors had a tough day yesterday. The reason? According to most pundits, the proximate cause was the S&P downgrade of UK debt. Many observers decided that the US might be next.

Bill Gross of PIMCO weighed in:

The United States will face a downgrade in "at least three to four years, if that, but the market will recognize the problems before the rating services -- just like it did today," Gross told Reuters.

Accrued Interest writes in this article, Bill Gross: Do you trust him? as follows:

Enter Bill Gross, always eager to talk his position. He stokes the fire by saying that the Treasury market is selling off due to ratings fears. Maybe. Indeed, I've heard that Asia is selling today. But always remember, when Bill Gross talks, he is always always always talking from position. So I'm assuming Gross is short Treasuries and today is adding.

No one outside PIMCO knows their position, but Gross is a savvy guy, so he is not speaking to hurt his own fund.

Jon C. Ogg points out that none of this is new information. Writing in his article, Did Bill Gross Short Sell Stocks & Bonds Via U.S. "AAA" Rating Comments?, he notes the following:

It is easy to add panic to the fire when you get an actual downgrade as we saw today from S&P on the U.K. Technically, that is just a bias downgrade, but that is still enough. The notion that someone with the clout of Bill Gross bringing this risk to light is troubling for investors who have been preparing for the next wave of the economy and credit to be better rather than worse.

The Irony

There is an exquisite irony in worrying about the S&P downgrade. This is a company vilified by nearly everyone for the failure to recognize the subprime risk, lamely giving AAA ratings to assets now viewed as "toxic waste."

All of a sudden, we are viewing these guys as the brilliant analysts who know the potential for nations to pay back debt. Really?

There is a serious public policy issue about government "bailouts" and the debt required. It is a matter of discussion among many serious economists. We do not pretend to offer an answer--not yet. On our site we are (informed) consumers of such information.

While we are still evaluating the arguments, we can state a preliminary conclusion: The S&P ratings will not be our first choice.