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S&P downgrade: Economics or politics?

By TOM RAUM - Associated Press
August 9, 2011

A statue of former Treasury Secretary Albert Gallatin stands guard outside the Treasury Building in Washington, Monday, Aug. 8, 2011, as stocks slid Monday amid a rout in global stocks after Standard & Poor’s downgraded the U.S. credit rating. (AP Photo/Jacquelyn Martin)The S&P downgrade was more of a statement on the toxic political landscape in Washington than a comment on the nation’s ability to pay its bills. But S&P has its own checkered history. Just a few years ago, the company gave its top triple-A rating to some of the mortgage-backed securities that helped cause the Great Recession.

Could it be wrong again?

New York-based Standard and Poor‘s was upfront about its focus on the political angle, citing the long standoff between President Barack Obama and Congress as a key factor in its unprecedented downgrade of the government’s credit rating.

“We think the debacle over raising the debt ceiling is one illustration of that,” John Chambers, head of S&P’s debt rating committee, said Monday. He said the political gridlock and S&P’s analysis of a rising U.S. debt burden in coming years prompted the downgrade.

Yet the credit-rating industry itself has been harshly criticized since the financial crisis of 2008-09, and S&P’s downgrade seems certain to increase congressional scrutiny.

The company was hardly revealing anything that wasn’t already well known by financial markets, politicians, analysts and probably most everyday Americans: The divisive political atmosphere in Washington has been leading to near-paralysis.

But is the rating agency qualified to make political as well as economic judgments?

“We didn’t need a rating agency to tell us that we need a balanced long-term approach to deficit reduction. That was true last week. That was true last year. That was true the day I took office,” Obama said Monday in his first remarks on the subject since the downgrade. “And we didn’t need a rating agency to tell us that the gridlock in Washington over the last several months has not been constructive, to say the least.”

But, he said, Washington has the power to fix its own political dysfunction. Furthermore, Obama asserted, “No matter what some agency may say, we’ve always been and always will be a triple-A country.”

Making its own judgments, Wall Street dumped stocks all day long. The Dow Jones industrials closed down 634.76 points — or 5.5 percent — in the first day of trading since the S&P downgrade. But investors sought refuge in Treasury bonds, a sign of confidence in the United States as a safe long-term investment despite S&P’s judgment. The price of Treasurys rose sharply, while yields, which move in the opposite direction from price, plunged.

Some lawmakers and economists have questioned whether the ratings agencies have the competence to evaluate the country’s finances, based on their own performance prior to the 2008-09 financial crisis.

S&P predicated its downgrade “on the theory that Washington might deliberately refuse to pay its debt because of a political impasse. But I don’t know what makes them experts at this,” said Rep. Brad Sherman, D-Calif., a member of the House Financial Services Committee.

“S&P’s main job is rating private issuers, and they have some expertise in that, although obviously they got it pretty wrong in mortgage-backed securities,” Sherman said.

“I find it interesting to see S&P so vigilant now in downgrading the U.S. credit rating,” said Sen. Bernie Sanders, I-Vt. “Where were they four years ago?”

Leading up to the financial meltdown in 2008, S&P and its sister credit-rating agencies gave coveted AAA ratings to some of the very mortgage-backed securities that later became nearly worthless, leading to staggering losses for many investors and funds. Also, the rating agencies had awarded top ratings to some of the financial firms that failed.

That gave them a black eye, and some analysts have suggested the S&P downgrade of U.S. debt was partly an effort to restore some of the lost confidence in the agencies’ ratings.

Stephen Hess, a former presidential adviser and a senior fellow emeritus in governance studies at the Brookings Institution, said S&P’s political discourse caught him by surprise.

“It suggests either that those of us on the outside either don’t understand what rating services do, or that there’s a new style there,” Hess said. “I felt I was reading a political judgment from an organization that I expected only gave financial judgments or economic judgments. It went well beyond the question of data.”

But Nigel Gault, chief U.S. economist with IHS Global Insight, based in Lexington, Mass., said he saw no problem with rating agencies delving into political matters.

“If they’re looking at Greece, for instance, they’ve got to consider whether or not the political system is able to take the action to stabilize debt,” said Gault. “You’re not looking at pure economics here because fiscal policy decisions are political decisions.”

Furthermore, Gault said, “there could be a default not because you can’t pay but because you choose not to pay. We got quite close to that.”

Neel Kashkari, a managing director at bond-fund giant PIMCO, said the recent budget deal made none of the hard choices that will be needed to bring the government’s budget closer to balance.

Kashkari, who earlier ran the government’s $700 billion bank bailout fund, told CNBC, “Until Republicans and Democrats show an ounce of backbone and do what’s in the interest of the American people, rather than what’s in their own immediate political interest, I can’t argue with S&P’s conclusion.”

Standard & Poor’s Financial Services is a subsidiary of The McGraw-Hill Companies, which publishes financial research and analysis on stocks and bonds. Tracing its roots back to the 1860s, S&P is also known for its stock index of 500 large U.S. companies.

The other two major credit-rating agencies, Moody’s Investor Service and Fitch ratings, also have warned of downgrades. But they have not joined S&P in doing so — for now.

The S&P action could lead to higher interest rates by making Treasury bills and bonds less attractive.

However, in practice, interest rates on Treasurys are already so low — and globally there are few safe-haven alternatives — that many analysts suggest it unlikely the downgrade would significantly affect the interest rates the U.S. government pays on its $14.3 trillion in debt.

The largest foreign holders of U.S debt — China and Japan — have not signaled plans to dump their U.S. securities. Still, China strongly condemned America’s “addiction to debts.”

It was federal debt — U.S. bonds — that got downgraded, but so far stocks are taking the biggest hit.

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4 Responses to S&P downgrade: Economics or politics?

  1. Carl Nemo

    August 9, 2011 at 6:23 pm

    Regardless of Standard & Poor’s motives, it was a good thing at the right time.

    Our Congress is remiss in doing what’s necessary concerning spending cuts. This recent budget bill passage was simply a stopgap until the massive ‘debt chickens’ come home to roost.

    It’s my hope that Moody’s does the same and if Congress doesn’t do what’s necessary they downgrade us again from their wimpy downgraded from AAA to AA+ to AA or even better yet AA- in order to wake up not only Congress, but he electorate concerning the serious state of affairs facing this nation.

    The Bernanke/Geithner show is a disaster with both these guys beholding to the interests of international creditors and flimflam investment firms such as Goldman Sachs

    I’m supplying a bio link for Tim Geithner. I recommend that readers spend the time to peruse his bona fides and in short order will discover this guy has been hooked up with all the movers and shakers that have led this country to the current fix in which we find ourselves. He’s ‘connected’ alright, but to elitists who are hellbent on establishing their New World Order, the U.S. and its citizens be damned. Ben Bernanke is basically an academician his specialty economics and from his performance an excellent ‘foot soldier’ on behalf of the shadowy oligarchs who’s plan is to render the U.S. into simply a minor plantation with their greater global order of such.

    http://en.wikipedia.org/wiki/Timothy_Geithner

    Carl Nemo **==

    • griff

      August 9, 2011 at 7:14 pm

      It wasn’t even a stop-gap measure, Carl. You’re being too kind. Ha.

      All this measure does is cap future spending, not cut it, and it can easily be overruled by a future Congress should we still be experiencing economic turmoil.

      It also puts it off until after the 2012 elections. Convenient, huh?

      I won’t mention the “Super Congress.” Jesus, with the Congress’ approval rating at around 14 percent, do we really need a super one?

      I guess it’ll make it easier for the KJ Street Gang, what with only 12 palms to grease.

  2. Danny Adams

    August 10, 2011 at 12:32 pm

    Maybe Obama should have done what Goldman-Sachs did to keep some of its S&P and Moody’s AAA ratings: pay the ratings agencies off.

  3. Sandune

    August 11, 2011 at 12:19 pm

    We have seen the Republican solution to this problem and it meant putting a terrible strain on seniors and those needing medicare including Hospice patients. This does not solve anything and in fact, puts more people in line for welfare services. I can’t help but think this was the whole solution. The government could fold up and the blame would be put on President Obama. There! Their problem is solved. Obama will take full responsibility and he will be replaced by (finally) a man of Evangelical Fundamental beliefs. Oh dear, it cannot be Romney or Huntsman as in their religion, Jesus is not a savior. It will have to be Governor Perry of Texas. We need another 8 years of President Bush…….

    That famous Alan Keyes Sin Amendment banning abortions, birth control, gay marriages and death with dignity will be reintroduced to our Congress who, if they play their campaigns well, will all be Evangelical Fundamentalists.

    If we have any plans to stop this offensive White House, we are too late. This should have been a priority for all Americans starting after Obama’s victory in 2008.