After U.S. downgrade, fingers point at S&P

August 8th, 2011 by Staff – It has now been more than 12 hours since Standard & Poor’s shocked the world with its U.S. credit rating downgrade, cutting it to AA+ from triple-A. Though rumours about such a move were floating around on Friday afternoon and contributed to that midday dip in the stock market. the downgrade nonetheless left jaws gaping.

Why? Rival ratings agencies Fitch and Moody’s had already affirmed their top-notch ratings on U.S. government debt earlier in the week, after Washington finally came to an agreement to raise the U.S. debt ceiling. A downgrade by S&P, even though they warned last month that such a move had a 50 per cent probability, just didn’t seem to fit the mood.

Markets, of course, can’t react on the weekend — but observers can. And one of the interesting initial reactions has been to go after the credit rater, rather than the United States.

Paul Krugman takes a swipe at S&P in his New York Times blog, while still acknowledging that Republican financial policies have made the United States “fundamentally unsound.”

“On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies,” he said. “The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?”

Ouch. But that has been a common refrain among observers: Because ratings agencies messed up so badly on rating mortgage-related securities at the height of the U.S. housing bubble, they no longer have the credibility to rate anything — or least U.S. government debt. (Greek debt, Irish debt and Portuguese debt, it seems, are fair targets.)

But Mr. Krugman also goes after S&P’s rationale for the downgrade, focusing on what he sees as S&P’s concern that the U.S. failed to agree on $4-trillion (U.S.) in deficit reduction over the next decade.

“Yet U.S. solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term,” he said. “What matters is the longer-term prospect, which in turn mainly depends on health care costs.”

“In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right.”

So there you have it: United States, victim.

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