Is it any wonder that the beneficiaries of Fed monetary mayhem would shrug off the news of the day? It puts their livelihoods at risk, so shrug away, imbeciles!
By Matt Phillips @ WSJ:
The commentary keeps coming, with every market watcher and their aunt Sally offering their two thoughts on what S&P surprise cut of its outlook for the U.S. debt rating from “stable” to “negative.” (The credit rater left Uncle Sam’s AAA rating intact.)- Barclays Capital: It is important to be clear on this. If the U.S. government were to default on its obligations, a very large financial panic is what we’d get. But as the saying goes, once they’ve exhausted all the other alternatives, US politicians can usually be relied on to do the right thing – and S&P’s move might actually serve as a reminder of what that right thing is. Just as it took two attempts for the US legislature to pass the TARP and save the world, so now we may need to be braced for a prolonged period of brinkmanship before a budget deal gets done.
- George Goncalves, Nomura Securities: We believe that although this news does bring to the forefront the longer-term profligacy of the US, this is something we’ve highlighted several times as a concern and is widely acknowledged by the market. To that extent, aside from the knee jerk reaction, this downgrade contains little new info. The most salient issue for Treasuries currently is the extension of the debt ceiling in the next few months and that is likely to have a greater impact in the near-term than 2012-2013 budget discussions. We had mentioned in the past that fiscal austerity measures needed to be passed, but that these weren’t pressing concerns, given the reserve currency status of the USD. We believe it will be a slow and drawn out process before foreign central banks can start investing their trade surplus reserves in any other currency. Until we reach that point (which is many years away, even by conservative estimates), sponsorship for USTs will continue to be strong from this demand segment.
- Lena Komileva, Brown Brothers Harriman: The S&P move to revise the U.S.’s AAA outlook from stable to negative has been a shot across the bow of market complacency about the U.S.’s medium-term debt outlook. The U.S. will have no problem in financing its deficit, but the role of U.S. government securities as the primary reserve asset in global public sector balance sheets and as the primary liquidity and capital risk hedge in financial balance sheets, means that a fallout from a potential U.S. debt re-rating would reach far outside U.S. borders. It is a low-probability event with high impact. If the AAA backbone of the global financial system is at risk of being lost, what happens to the rest of the credit structure?
- Societe Generale Cross Asset Research: While a credit warning for the U.S. was somewhat expected by the market, it was not anticipated to be so soon. The early threat of a downgrade may help U.S. policy leaders to make progress on agreeing to substantial budget cuts. The Washington Post reports that a deal on Medicare is at hand. It also provides the doves at the Fed further reasons to maintain accommodative monetary policy and hence reinforces the inflation/EM trade.
- Paul Ashworth, Capital Economics: S&P’s biggest concern seems to be that the Democrats and Republicans will struggle to agree on a comprehensive plan to address the medium-term fiscal problems before the Presidential election in late 2012. S&P now puts the odds of a downgrade within the next two years as high as one-in-three. With the Republicans controlling the House and the Democrats controlling the Senate, and both sides proposing radically different plans to cut the deficit, this is a concern we would share. Things could get even messier after the election, if Obama is re-elected but the Republicans capture control of the Senate.
- Goldman Sachs Economics: A rating outlook change has no immediate implications—in particular, it does not make a difference in terms of current bond mandates. It does flag the possibility of an outright ratings downgrade within the next few years, which would have material market implications for investors required to invest a specific portion of their holdings in AAA securities. According to S&P, the negative outlook “signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years.” (Historically, the frequency of ratings downgrades for AAA sovereigns on negative watch is actually much lower than 1 in 3 over this horizon, although there is of course no guarantee that will remain true in the future.)
