Friday, August 05, 2011

First downgrade of U.S. credit rating - The Washington Post

UPDATE:  Shortly after the original post, the downgrade did in fact happen...

From The Guardian:

"S&P had held back cutting the rating earlier in the day, after the US government reportedly questioned its maths. But the agency insisted it was cutting America's top AAA rating by one notch to AA-plus, saying the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilise its debt situation. 
This is the first time that S&P has issued a "negative" outlook on the US government since it began rating the credit-worthiness of railroad bonds in 1860. 
The dramatic reversal of fortune for the world's largest economy means that US treasuries, once seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany or France."

Upon some reflection, I do believe (or at least hope) that this is a good thing in the long run.  In class we harp that the market is a harsh disciplinarian and it will force managers to think long term even when they themselves have a short term horizon.  We teach that bondholders may help to monitor firms with free cash flow problems.

This is not that different.  Politicians have a short term horizon. And in the absence of shareholders, bondholder really are in the best position to monitor politicians.  (Some may argue that the regular elections serve as the most effective monitoring tools, I disagree.  Incentive problems and conflicts of interest are too strong here:  how often will people vote against money/goods/services going to themselves?)

So it is my hope, that a century from now, history books will look to this day and say, that was the start of the US getting its fiscal house in order.  The choices over the next decades will not be easy, but without some market discipline, I fear the necessary decisions would never be made.

Original post:

S&P considering first downgrade of U.S. credit rating - The Washington Post:
".....S&P officials advised the Treasury that it had decided to lower the AAA credit rating, which the U.S. government has held for 70 years.

Analysts say the immediate term impact is likely to be modest because the markets have been expecting a downgrade by S&P for weeks.

Some analysts are worried about the impact of a downgrade on markets where Treasurys are held as collateral and the AAA rating is required."

Sort of surprised it came now, but not at all surprised it happened. Most speculation was that it would happen this fall.

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