The Wall Street Journal is reporting that Standard & Poors has just downgraded the credit rating of the United States from a AAA rating.
This is a HUUUUGE story. What do I see as the implications?
1. Short term lending markets will get tighter and activity will likely decline as the quality of what had been the highest quality collateral, US Treasury debt, is now downgraded.
These short term lending markets, also known as the repo market, are the liquidity in our financial markets’ engine. As the liquidity lessens and does not flow as smoothly, overall activity in the markets will be negatively impacted.
2. Other entities which had owned and used US Treasury debt for collateral purposes will be negatively impacted by the higher costs of holding lower quality debt. Other entities which were closely aligned with the US Treasury, such as Freddie and Fannie, will also be negatively impacted in terms of higher borrowing costs.
3. As I highlighted the other day, highly regarded interest rate strategist Terry Belton at JP Morgan believes there will be a knee jerk reaction toward higher rates of 5-10 basis points with a longer term increase of 50-70 basis points. These higher rates will impact longer term borrowing costs more than short term borrowings. Given the fact that the long end of the US Treasury curve sold off hard today, I can only guess that market participants today saw this coming.
4. The United States will lose real leverage in terms of negotiating with our trade partners and largest creditors.
The Wall Street Journal just released the following report, S&P Downgrades U.S. Debt Rating,
Standard & Poor’s took the unprecedented step of downgrading the U.S. government’s “AAA” sovereign credit rating Friday in a move that could send shock waves through global. The following is a press release from Standard & Poor’s:
– 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.
I would expect the global equity markets to continue to selloff on Monday as a result of this downgrade. The yield curve will clearly steepen (long rates will head higher while short term rates will likely stay static). The US dollar will give ground. Do not be surprised, though, if the Federal Reserve and US Treasury engage in coordinated fashion to enter the markets and stabilize them. Gold will assuredly rise in value.
In regard to the economy, this downgrade will negatively impact our economy in terms of consumer and business confidence.
The onus and burden of this downgrade will most immediately hit President Obama and this Congress. They deserve plenty of heat.
The fact is, though, every President and Congressmen who have been engaged in ‘incestuous political and business’ relationships and engaged in wasteful and wanton fiscal management over the years have their fingerprints on this fiasco.
THIS IS YOUR LEGACY, WASHINGTON!!
Please nobody ask them to offer an opinion on this downgrade. A Downgrade is a downgrade.
The fact is most of our pols clearly could not manage their way out of a paper bag, although they have no problem finding their way into that bag, especially when it is filled with campaign contributions from their incestuous partners.
On behalf of my children and all American children, “THANK YOU FOR VERY LITTLE!!”
So much for The Great Society.