The Downgrade
Aug 7, 2011
Posted by Jody Eisenman | Filed under Uncategorized
It finally happened. After months of rumors and intense negotiations, the Standard and Poors’ rating agency had downgraded the US long term debt rating for the first time in history. This downgrade will affect roughly $9.3 trillion in government debt. Quite frankly, I was wondering what took so long. Readers of this blog know that virtually every industrialized nation in the world is heavily in debt. If the United States were a publicly traded company, there is no question that our debt rating would be much lower than the current AA+. What is keeping it this high is the two headed monster of our ability to print money at will, and investors’ desire to buy bonds at almost any price. The United States is viewed as the least soiled sheet in the hamper.
Although one would normally expect rates to rise (in order to compensate investors for the additional risk), I have real doubts whether this will actually happen here. First of all, Europe is in turmoil. Second of all, the benchmark ten year closed yesterday at an all-time low yield of 2.39%. It’s not as if bond buyers were shying away these past two weeks. What is more troubling is the stock market. Friday concluded one of the wildest days in history, where the DJIA swung from a 150 point gain to a 220 point loss, and back to a 150 point gain, before finally settling on a gain of about 60 points. All told, however, the DJIA fell almost 700 points for the week. All eyes are turning to Europe to see if the G-7 comes up with a plan to stabilize the markets. If this does not happen, there is really no telling how the markets will react this week.
August 8th, 2011 at 6:44 pm
Jody,
is there a fundamental difference between the methods used by Moody’s vs S&P? If so, what is it?