We have been openly wondering for the past couple of weeks, how S&P would react to the new debt ceiling deal. Well… the answer is in! The envelope please… And the rating for These United States of America is now AA+. Yep, downgraded from AAA.
Hungary called and wants its rating back.
So, Moody’s and Fitch maintained our gilded rating, but S&P had the unmitigated gall to drop the credit rating of the world’s Reserve Currency.
What does this mean for stocks on Monday? Probably very little. Despite the downgrade, the U.S. is still the most financially stable economy on the planet Earth. By and large, the rest of the world is worse off, and if the downgrade inflames the global crisis atmosphere, U.S. assets will become more desirable. I would not be surprised to see Treasuries to rise on the downgrade, the dollar to rise, and gold and silver to fall. At least in the short-term. Once you’re through the Looking Glass, everything can be upside down. And the “logical” trade can end up being devastating if you chose to place it.
What follows is an extract from the downgrade announcement by S&P:
“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability. It is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021.”
The response from the Federal Reserve’s Board of Governors, taken directly from their website:
Joint Press Release
Federal Deposit Insurance Corporation
National Credit Union Administration
Office of the Comptroller of the Currency
Agencies Issue Guidance on Federal Debt
Earlier today, Standard & Poor’s rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies are providing the following guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies (collectively, banking organizations).
For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected.