Saturday, August 06, 2011

Debt and Ratings

I've been reading a number of really good analyses of this situation, and I'm fascinated to find that the questions in my mind are being asked by people with much more experience and subject mastery than I have.  So here are the points that annoy me:

Standard & Poor's has now downgraded U.S. Treasury Debt to AA+ (which is still pretty good).  Their argument that the deal signed this week didn't reduce the debt enough is clearly invalidated by the two trillion dollar arithmetic error in the original analysis they delivered to Treasury on Friday. 

Which brings us to the real point:  this was not an economic decision.  I have to admit I can't argue with their premise that they are downgrading U.S. debt, not because the U.S. is unable to pay, but because the U.S. appears (in the person of its Congress) to be unwilling to pay.  Felix Salmon made this point in his blog at Reuters:  
"... there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default. The Tea Party is fully cognizant that it has been given a bazooka, and it’s just itching to pull the trigger. There’s no good reason to believe that won’t happen at some point."
Given the brilliant analytical skills Standard & Poor's displayed over the last decade or more, I don't understand why anybody pays any attention to them.  Leaving aside their stellar performance during the subprime mess, these were the people who rated Enron AAA, right up to the day the whole pyramid collapsed.  On that basis, the U.S. should still have its rating.  We're certainly in better shape than Enron was; and we haven't defaulted yet.

So why does anyone pay attention to them?  Because the U.S. Government says they must.  The Treasury Department chooses not to be in the business of rating the securities that banks can invest in, so they've outsourced that business to the three rating agencies.  Who have just downgraded the debt they issue.  Does anyone else find this weird??  Move over, Mad Hatter, I want a clean cup.


  1. The decision had clear political overtones. I thought politics wasn't supposed to be a part of the analysis.

  2. I thought rating analyses were supposed to reflect the actual financial status of the companies rated, too; and we know how well THAT worked out. I notice that S&P is the only rating agency (so far) that has pulled the plug; although I heard mutterings from I think Fitch today that their long-term outlook would depend on what the "super committee" comes up with. Sure it isn't supposed to be political; well, it is, and we have no recourse.