S&P’s Rating Downgrade Of US Debt – Looking Back

S&P’s Rating Downgrade Of US Debt – Looking Back
By Standard & Poor's, User:Stepshep (Vector taken from 1 coloring based off of 2) [Public domain], <a href="https://commons.wikimedia.org/wiki/File%3AStandard%26Poors.svg">via Wikimedia Commons</a>

Looking back at their fateful downgrade of the U.S. AAA bond rating this time last year, would rating agency S&P wish they had done things differently?

S&P's Rating Downgrade Of US Debt - Looking Back

On the fact of it, none of the doom-and-gloom scenarios that the market painted after the downgrade have come about. At the time the agency was both praised and lampooned for its decision to downgrade U.S. debt.

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Let us forget about a lowly $2 trillion, or so mistake somewhere in the calculations, as tom-tommed by the Treasury Department.

On the broad front of economic issues, a major fallout that was expected, was a rise in the cost of domestic borrowing. Even though S&P had predicted about a 0.5 percent rise in long term rates, what has actually happened? The yield on the 10-year T bond has fallen from 2.58 percent last year to currently 1.56 percent. This is because of the continued demand for U.S. treasuries as a safe haven investment because of the turmoil in Europe. Most of the other developed countries are themselves in trouble with their ratings, and no sovereign government can be considered entirely safe.

The U.S. dollar was also supposed to take it on the chin with the downgrade. Instead it is up 10.19 percent over the last year. Regardless of the frailty of the U.S. economy, and simply because it is doing badly but others are doing worse, the dollar has become one of the world’s last bastions of safety, it has appreciated rather than losing value as expected.

What about stocks? They were supposed to swoon and die, due to higher interest costs that would sap the economy of growth. In reality, the S&P 500 was 1199.38 on 5/8/2011, and is 1398 today. That’s a growth of 16.5 percent! American companies have proved hardier than thought, and profits have come by, but with costs cut all around.

And the yellow metal? Gold, the ultimate safe haven, has yielded to the power of the U.S. dollar and bonds, and instead of cracking $2000 an ounce and proceeding northwards, has instead lost 3 percent over the year.

Last but not the least – the politicians. One of the main reasons for the downgrade was the seemingly irreconcilable differences between the political parties to advance any practical solutions to bridge the ever-mounting deficit, and hence fiscal debt. These differences remain, and the danger of a compulsory $600 billion spending cut taking effect on January 1 is very real. This could have a very real effect on the economy. This is where S&P could have the last laugh.

That is because the fundamental economic weaknesses are not wished away. In fact, the main and positive impact of the downgrade is the focus it brought on fiscal house-keeping and discipline.



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