18 February 2009

Credit ratings agencies

In this article, Standard & Poor's answers a number of questions posed by gtnews.com. This one caught my eye:

Q: Why haven't the CRAs downgraded the US AAA rating?

A: We have affirmed the ratings on the US despite our judgment that fiscal risk has noticeably increased because we expect that the fiscal deterioration will be temporary and that the country's other credit strengths will withstand current pressures.

The ratings on the US primarily reflect our opinion of the sovereign's high-income, highly diversified, and exceptionally flexible economy. The ratings also reflect our view of its strong track record in terms of growth-enhancing policies, as well as the unique advantages coming from the US dollar's role as the key international currency. In our opinion, these strengths continue to outweigh the US's weakening current-year fiscal performance, growing risks in its financial sector, longer-term challenges associated with its entitlement programs, and the nation's weak external position.

If you read it quickly it sounds OK. Lets list the negatives:

* weakening current-year fiscal performance - they think it is only "temporary"
* growing risks in its financial sector - I'd say "exceptionally" growing
* longer-term challenges with entitlement programs - they spend more than they earn, isn't that bad noncurrent-year fiscal performance?
* weak external position - isn't that another way of saying they spend more than they earn?

Outweighed by:

* high-income economy - what does that mean?
* highly diversified economy - any contraction in spending will also be highly diversified
* exceptionally flexible economy - yes, with high unemployment people will be exceptionally flexible about what jobs they will do
* growth-enhancing policies - euphemistic phrase for easy credit - debt, debt, debt
* key international currency - that is, foreign investors give them money that allow the growth-enhancing policies.

Have S&P considered that the key international currency is not something that mitigates against the negatives, but that the negative can affect the USD status as a key international currency, that people will not want to hold it debts because of the negatives, that this will undercut growth-enhancing policies, in which case you only have the diversified and flexible economy left as positives?

1 comment:

  1. Bron, None of this stuff matters. The only thing that matters is that U.S. Treasuries are denominated in U.S. dollars and there is no finite limit on the joint ability of the Federal Reserve and Treasury Department to create new dollars to pay them off. Since neither S&P nor Moody's has currency devaluation built into their credit risk models, there is no reason to expect that Treasuries will ever be downgraded from triple A rating regardless of the circumstances.