RIP: AAA

For the first time in history, the creditworthiness of the United States of America has been downgraded:

A cornerstone of the global financial system was shaken Friday when officials at ratings firm Standard & Poor’s said U.S. Treasury debt no longer deserved to be considered among the safest investments in the world.

S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn’t do enough to address the gloomy long-term picture for America’s finances. It downgraded U.S. debt to AA+, a score that ranks below Liechtenstein and on par with Belgium and New Zealand.

The unprecedented move came after several hours of high-stakes drama. It began in the morning, when word leaked that a downgrade was imminent and stocks tumbled sharply. Around 1:30 p.m., S&P officials notified the Treasury Department they planned to downgrade U.S. debt, and presented the government with their findings. But Treasury officials noticed a $2 trillion error in S&P’s math that delayed an announcement for several hours. S&P officials decided to move ahead anyway, and after 8 p.m. they made their downgrade official.

S&P said “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.” It also blamed the weakened “effectiveness, stability, and predictability” of U.S. policy making and political institutions at a time when challenges are mounting.

So we’re a bigger credit risk than Liechtenstein. Who knew? (Well, S&P I suppose…but still!)

This is mostly theatrics. Everyone knows the numbers of America’s finances; they’re no secret. The idea of downgrading the debt of a superpower is frankly, a bit silly.

Think of it this way: America’s creditworthiness is rated every minute of every day. That’s what the bond market is. Any ratings agency can issue a report and say what they want about our debt — that’s no big deal. What is a big deal is that investors around the world are willing to pay absurd amounts to lend to us.

Ultimately, that’s what a credit rating is all about. If creditors trust us, our credit standing is high. Look at interest rates, not at what a bunch of analysts say in New York.

Posted by on August 5th, 2011 at 9:28 pm


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