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S&P Yielding to Tea Party? PDF Print E-mail
Articles | Business
Written by Morphus on Sunday, 07 August 2011 23:36   


‘Doesn’t Change Anything’


S&P’s move “doesn’t change anything about the risk of U.S. Treasuries,” Peter Fisher, New York-based BlackRock’s head of fixed income and a former undersecretary of the U.S. Treasury Department, said in a Bloomberg Television interview.


Credit-default swaps that protect against default on U.S. notes for five years fell 11 percent last week to 55.4 basis points, CMA data show. That compares with an increase of 16 percent to 74.2 for swaps linked to Germany, an 18 percent climb to 143.8 for France, and a 4.5 percent increase to 77 for U.K. government securities. S&P rates those countries AAA.


Economists said S&P erred by basing its decision on politics instead of sticking to the assessment of the nation’s finances.

“They think they’re giving an honest appraisal but they have instead become hopelessly entangled in the politics of the national debt,” Chris Rupkey, the chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in a Bloomberg Television interview on Aug. 5. “The U.S. is not out of money, it has the financial resources to make good on its debt, and it should not have been downgraded.”


$2 Trillion Error


John Bellows, the Treasury’s acting assistant secretary for economic policy, said in a blog post that S&P initially overestimated future deficits by $2 trillion over 10 years. “After Treasury pointed out this error -- a basic math error of significant consequence -- S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit-rating decision from an economic one to a political one,” he wrote.


S&P said in a statement that the revision lowered its forecast for the debt-to-gross domestic product ratio in 2015 by two percentage points and didn’t affect its ratings decision. S&P said in the Aug. 5 report that the ratio of debt to GDP would reach 77 percent in 2015 and 78 percent by 2021.


In 2009, when S&P reaffirmed the U.S.’s AAA rating, analysts led by Nikola Swann wrote that the ratio would approach 90 percent by 2013.


‘Always Wrong’


“The old fashioned ratings agencies where humans make the decision to downgrade are always wrong,” Christopher Whalen, managing director at Institutional Risk Analytics, said yesterday in a telephone interview.


S&P came under scrutiny for ratings of financial products linked to subprime mortgages after losses and writedowns by the world’s biggest financial institutions reached $2.1 trillion.


The Financial Crisis Inquiry Commission called S&P and Moody’s “key enablers of the financial meltdown” in its January report. In April, a Senate panel said that the rating companies engaged in a “race to the bottom” to assign top grades on mortgage-backed securities in order to win fees from banks.


S&P kept an A- rating on Iceland until October 6, 2008, when the country’s government was forced to guarantee all domestic bank deposits after its currency plunged. The company reaffirmed its AAA rating for Lehman Brothers Holdings Inc.’s financial products unit on Sept. 12, 2008, three days before the bank failed. It downgraded Bear Stearns Cos. to BBB on March 14, 2008, two days before JPMorgan agreed to buy the failing securities firm.


‘Last People’


“There is no reason to take Friday’s downgrade of America seriously,” Nobel Laureate Paul Krugman said in a New York Times column. “These are the last people whose judgment we should trust.”


While S&P cut Japan’s credit rating to AA- in 2002, the country has no difficulty borrowing. Japan’s 10-year notes yield 1.02 percent, compared with 2.35 percent for AAA rated German bunds, Bloomberg data show.


“In those rare cases where rating agencies have downgraded countries that, like America now, still had the confidence of investors, they have consistently been wrong,” Krugman wrote.


S&P said in its report that the failure by politicians to act on increasing government revenue also was a consideration in its decision. It no longer assumes that the 2001 and 2003 Bush tax cuts would expire by the end of 2012 “because the majority of Republicans in Congress continue to resist any measure that would raise revenues.”


Politics as Factor


Politics is listed as one of five “key factors” in S&P’s methodology for grading governments. “Part of our analysis assesses how government policymaking affects a sovereign’s credit fundamentals,” Ed Sweeney, a spokesman for the ratings company, said yesterday in a telephone interview.


S&P gives 18 sovereign entities its top ranking. The U.K., with a debt estimated at 80 percent of GDP this year, or 6 percentage points higher than the U.S., has the top credit grade. In contrast with the U.S., its net public debt is forecast to decline either before or by 2015, S&P has said.


“To downgrade you have to argue there’s an increased chance that we won’t pay our debts,” said Peter J. Solomon, founder of New York-based investment bank Peter J. Solomon Co. and a one-time counselor to the Treasury Secretary under President Jimmy Carter. “I don’t think that’s been proven, I think it’s been proven that we always will pay our debts.”




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