No matter which side of the political fence or economic Continental Divide you sit on, few can deny that this was the week that was. It began with the controversial debt-ceiling deal about which I wrote in my last column. Shortly after the President signed off and the legislation became law—a remarkably silly law, even in the context of a country with so many silly laws—Moody's issued a statement that it would not change the AAA rating given to US government debt, although the company's "outlook" was announced as negative. This signaled to the cognoscenti that there was about a one-in-four chance that the rating would be lowered in the short term. Moody's is one of the big three rating agencies that rate debt issued by corporations, governments, and investment banking products such as the now famous (or infamous) mortgage-backed securities which damn near destroyed the world economic order.
If the U.S. Credit Rating Goes Down, Your Credit Card's Interest Rate Goes Up
But then last Friday evening, Standard & Poor's, arguably the best-known and most important of the rating agencies, lowered its rating on U.S. debt from AAA to AA-plus. This was the first time in history that the U.S. debt rating fell below AAA. It came as a surprise to many—despite the endless discussion of the possibility of a ratings cut throughout the world media over the months-long course of the debt ceiling tragicomedy. Part of the surprise was the timing of the announcement, made after U.S. markets were closed for the weekend, though historically many businesses announce bad news on Friday evenings in the hope that panics can be averted if people have a few days to digest and reflect upon it. The first market reaction came when Asia opened on Sunday night, and then when Europe opened a few hours later but still several hours before trading began in New York.
Over the weekend, experts around the world explained why the actual lowering of the rating wasn't important, that it was already baked into the market's pricing of equities, and that it wouldn't have the effect of raising interest rates paid by the Treasury, or paid by us to our mortgagor or credit card company. Lots of reasons were given as to why the action by S&P was really a nonevent: after all, Japan's debt had been downgraded some years ago with no discernible effect on their interest rates or their economy as a whole. Everyone knew that the debt ceiling would be lifted anyway, and everyone knows that it always will be; and, of course, countries like France, whose debt-to-GDP ratio is much worse than America's, still have an AAA rating so any downgrading of U.S. paper was merely a blip.