To quote ’80s Soviet-dissing comedian Yakov Smirnoff, “What a Country!” Because you can think of that punch line only when pondering how uniquely positioned America is to be fiscally profligate.
In August of 2011, you’ll recall, amid the debt-ceiling debacle, Standard & Poor’s did the unthinkable and downgraded the U.S.’s credit rating. Did the dollar collapse? Treasuries plunge? Bond vigilantes with pitchforks maraud down the corridors of Wall Street? Just the opposite: By dint of our being the global reserve-currency of choice, and Treasuries being the redoubt of safety and liquidity, U.S. bond prices rose and yields fell, with our printing presses maintaining full-tilt. Risk on or risk off, creditors the world over can’t seem to get enough of American debt.
Now there’s the sequel to the debt ceiling drama, the Fiscal Cliff, a budgetary tragedy entirely of lawmakers’ creation.
So how will the credit raters and debt markets react to this surreal state of affairs?
S&P put out a Dec. 28 bulletin, “Congressional Impasse On Fiscal Cliff Does Not Affect U.S. Sovereign Rating.” The rating giant cited its 2011 downgrade language, when it called out “the political brinkmanship of recent months [that] highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable”—to reiterate now that it “believes that this characterization still holds.”
But this time a political imasse means a cut in the deficit. “If lawmakers reach no agreement,” S&P says, “the Congressional Budget Office estimates that the government will receive additional revenue and will forgo additional expenses of upwards of $500 billion (3% of 2013 GDP) a year.”
For Moody’s part, it remarked on Dec. 27 that its “Aaa rating of the U.S. government is based on an assessment of very high economic strength, very high institutional strength, very high government financial strength, and low susceptibility to event risk. The rating carries a negative outlook, which was assigned primarily due to the rapid increase in federal government debt during the past five years and the uncertain debt trajectory in the medium term. … The statutory debt limit will be reached soon if Congress does not act to raise it. … Our view is that the probability of a missed interest payment on bonds resulting from a failure to raise the debt limit is extremely low.”
Fitch, well: We’ll spare you the riveting boilerplate.
Point is, for all the Big Three’s codified importance to investors, not many seem seem to be waiting with bated breath for their reaction to what ultimately emerges from Washington’s cliff impasse. “S&P downgrading the U.S. last year was meaningless, because people don’t rely on S&P to tell them the credit quality of the U.S. government,” says Donald Steinbrugge, managing partner of Agecroft Partners, a broker-dealer that serves hedge funds. He says if Congress does not reach an agreement on the budget and the fiscal cliff is implemented, the markets will be the primary judge of the ripple effect on the broader economy and corporate profits. “This will result in a selloff,” he says, “where the degree of decline will depend on how long investors believe the cliff will be in place.”
On the last day of the year, with an hour of trading left, no resolution from the Beltway, and the Department of Treasury hitting up against its debt ceiling, the Dow Jones Industrial Average is up 145 points.
Meantime, since the U.S. downgrades of 2011, the Standard & Poor’s 500 index has returned a total of 23 percent (it has been up for the year every day of 2012); volatility, as measured by the VIX, has plunged, and government bonds have been in clover. In fact, the 10-year Treasury yield averaged 1.79 percent this year, its lowest since 1941.
Makes you wonder how bad America will have it if and when it gets upgraded.
