Did S&P flip flop on US debt target?
LONDON, July 28 (IFR) - Just when the rating agencies were starting to win some kudos for standing firm in the face of increased regulatory pressure and posturing by politicians, one of their number goes and ruins it.
It appears that the perception Standard & Poor's seemed to harbour, that the U.S. needed to find a $4trn sized package in order to keep its triple A rating, is unfounded.
Two credit research reports published today point to the testimony given by S&P president Deven Sharma to the Congressional House Financial Services subcommittee on Wednesday, where he seems to believe his firm has been misquoted in media reports.
On July 14, S&P placed the AAA long-term and A-1+ short-term sovereign credit ratings of the U.S. on CreditWatch negative, indicating action will likely take place within three months.
Its report stated that the negotiations on the state of the U.S. fiscal position and debt ceiling had become entangled and said:
"We expect the debt trajectory to continue increasing in the medium term if a medium-term fiscal consolidation plan of $4 trillion is not agreed upon."
Prior to this, the agency had outlined that the U.S. debt-to-GDP ratio would probably reach 84% by 2013 and this was a weak debt trajectory compared with the closest AAA rated peers - France, Germany, the UK and Canada.
It then follows with what appears to be an admirably unambiguous statement:
"If Congress and the Administration reach an agreement of about $4 trillion, and if we conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the 'AAA' long-term rating and A-1+ short-term ratings on the U.S."
But Sharma now appears to be saying that S&P was merely commenting that the $4trn figure, postulated by congressmen and the administration, would bring the AAA rating into a sustainable range.
Gary Jenkins of Evolution Securities apologised to his followers for having "misread" the S&P statement.
Not everyone will be as generous as Jenkins. It is hard, if not impossible, to read S&P's July 14 report and come to any other conclusion as to what it really believed.
If S&P wants to change its stance, it should come out and say so. It would have plenty of reasons to keep the rating at AAA, while keeping the negative watch.
In the words of Alex Johnson, head of portfolio management at Fischer Francis Trees & Watts:
"The US dollar is a fiat currency. At heart, it represents a claim on the productive capacity of the U.S. economy. What does a rating even mean in the context of the United States?"
Quite. But because so many investment decisions are rules based and embedded into the financial system, markets have suffered considerable volatility and weakness because of the perception that a ratings cut was all but inevitable.
There is no liquid alternative to U.S. Treasuries, so their status in finance will continue - as will the benefits that brings to funding a massive budget deficit.
Leaving the credibility of S&P to one side - Deutsche Bank's report takes the view that the agency appears to have won itself more "wiggle room on the $4 trillion number".
But at what cost? That is the question it should be asking itself.
(Reporting by Alex Chambers; Editing by Philip Wright.)
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