As telegraphed as it may have been in the 4 months leading up to this summer’s debt ceiling showdown, and as ham-fisted as the message was ultimately delivered, when Standard & Poor’s actually cut the AAA credit rating of the United States that hot Friday evening of August 5th, it still shocked the world.
Nearly three months later, there’s word that it is about to happen again, only this time, at the hand of either Moody’s or Fitch. In a note to clients, Merrill Lynch economist Ethan Harris writes:
“We expect at least one credit downgrade in late November or early December when the super committee crashes.”
The super committee is a reference to the bi-partisan panel of 12 lawmakers selected to do what the body of Congress couldn’t: Balance the budget and meaningfully move to reduce the nation’s burgeoning debt and deficit or allow sweeping automated cuts to occur.
It’s not as though Fitch and Moody’s haven’t warned Washington that it is on an unsustainable fiscal path, or that investors haven’t taken note of the fact Exxon Mobil (XOM) or Microsoft (MSFT) are in better shape to repay debt than Uncle Sam.
So far the CDS (credit default swap) market has not paid much attention to another downgrade. The cost of insuring yourself against the risk of a U.S. default is currently hovering about 30% below the peak in August and clearly trending lower.
The irony in all of this is that the S&P’s downgrade had the inverse effect on the treasury market. The yield on the 10-year note fell from about 2.5% in early August to 1.75% in late September as investors sought the unmatched safety and liquidity that only the U.S. government bond market can offer – credit rating be damned.
Officially, there are still 19 nation’s in the world that carry the AAA rating, including Germany, the UK, Canada and France, the latter of which could be next on the chopping block as markets and analysts are already predicting and pricing in.
On a side note, the second largest shareholder of Moody’s (MCO) is none other than Warren Buffett, who was not only critical of the action taken by Standard & Poor’s, but said he felt the “U.S. deserved a AAAA credit rating.”
Matt Nesto-Yahoo Finance October 24, 2011