Tuesday, August 9, 2011

S&P's downgrade may be more about political than financial risk - latimes.com

S&P's downgrade may be more about political than financial risk - latimes.com

The credit ratings firm Standard & Poor's didn't enhance its tarnished credibility with its decision Friday to downgrade Treasury securities from "risk-free" AAA to AA+. Having seen no evil during much of the housing boom, S&P has flipped to the other extreme in regard to Washington's fiscal problems, declaring T-bills to be a less reliable investment than bonds issued by Luxembourg or the Isle of Man. Its overreaction prompted sell-offs in financial markets around the globe, causing billions of dollars worth of equity to evaporate.

Credit rating agencies are supposed to make judgments about financial risks, not political ones. And on financial terms, it's hard to justify even a slight downgrade on U.S. bonds. The 14th Amendment arguably requires that the Treasury pay bondholders ahead of any other creditor. Even with the enormous deficits the government has been running, Washington still collects far more money each month than is needed to stay current on its debt payments.

One of S&P's main complaints was that the $2.4 trillion to $2.7 trillion in deficit reduction that Congress and President Obama finally agreed to this month wasn't enough to stop the U.S. debt from growing relative to the size of the economy. Its initial analysis, however, was based on outdated budget projections that ignored previous spending cuts, throwing its calculations off by $2 trillion. Yet it stuck by its conclusions despite the error, suggesting that the data weren't as important as the politics.

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