S&P downgrades the USAAA | FT Alphaville

S&P downgrades the USAAA

It happened. After quite incredible reports of miscalculations, it happened. The thing that is perversely both meaningless and full of meaning was announced on Friday evening New York time. The United States of America is now rated AA+ with negative outlook by Standard & Poor’s.

Overview from the release below, or click through the image below to read the entire rationale:


· We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.

· We have also removed both the short- and long-term ratings from CreditWatch negative.

· The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.

· More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

· Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us

pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

· The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

Cue… well, we’re not quite sure yet.

There are a few predictable direct effects but it’s the second, third and fourth order effects that will have people worrying over the weekend. There has been a fair amount of time to prepare but prepare for what is the question.

It’s worth looking back at our account of the meeting between the Fed, the US treasury and the major broker dealers on the Friday before the resolution of the debt ceiling crisis. Issues relevant to preparing for a technical default are relevant here, too. For example, will there be any provisional support announced for Money Market Funds or flexibility on bank capital rules?

Indeed, the Federal Reserve announced late on Friday that risk weightings would not be affected. Not much surprise there.

It’s all about the collateral, and the deposit crisis, remember.

The US is still, of course, rated AAA by Fitch and Moody’s — the good and the bad to S&P’s ugly. A split rating should mean fewer knock-on impacts. And as Martin Wolf always tells us — and anyone within earshot — credit rating agencies provide absolutely zero new information about US treasuries. It’s the linkages and the contagion (the horror! the horror!) that matter.

Therefore, we guarantee some European-style political bloviation, especially given the palaver over the maths, but the tangible impact remains unclear.

Still, feels like a big deal, no?

Related links:
Alternatives to the USAAA – there’s not much – FT Alphaville
Rating (ir)relevance and downgrade speculation – FT Alphaville
The price of distressed defeased treasuries – FT Alphaville
Things affected by a US downgrade – FT Alphaville