Standard & Poors And Why They Are Still Wrong

Last year on August 5th, in a press release Standard & Poors (S&P) landed a nuclear bomb on American creditworthiness. After the dust settled from the financial crises, rating agencies were targeted by regulators as “failures to act” in not doing enough to properly report and avert institutions from “junk” creditors. So, with renewed fervor and like a rabid animal, it then turned on the U.S! For the first time in its history it was downgraded to AA+...but was it justified? The latest data reported in FuturesMag this past week suggests that it may have been premature and misguided, here’s why…

…says Zach Pandl, Senior Interest-Rate Strategist at Columbia Management Investment Advisers LLC. He instead looks to New York & Washington Federal Reserve data and finds:

• From its 2008 peak, consumer debt has declined by 10.23% to $11.4T as of Q2
• The commercial paper market has shrunk by 56.08% from its 2007 record of $2.22T
• If the $821B year end forecast is correct, net U.S. taxable debt issuance (i.e. corporate, mortgage, and treasuries) will be down 65.72% from its peak in 2007

Do you still think Standard & Poors is credible and their rating justified?


However, last year 67% of Bloomberg’s Global Poll thought it was justified and the growth forecast for U.S in 2013 is expected to be a mere 2.1%. John Piecuch, a spokesman for S&P was quoted last week Friday saying that,

…there isn’t a plausible scenario for the U.S to grow its way out of the deficit.”

But out-growing the deficit is only a one-sided solution…

1.) The latest data which shows that ALL public and private debt is down $4T to 3.29 x GDP, a six year low as of last Tuesday. This in turn relieves some “purchasing stress” of the Treasury in issuing new securities. Furthermore, yields fell 43bp in 2011 and bids this year are at record highs, $3.16 for $1 of debt on 3-, 10-, and 30-year issues.
2.) Total household wealth has risen by 22.46% to $62.7T by September according to the Federal Reserve and the S&P/Case-Shiller Index is back to its summer 2003 levels which can possibly explain the impact on consumer deleveraging.
3.) CDS on U.S debt are down to 41.2 from its 2009 high of 55.4.

What’s your opinion on the current state of debt in the United States?


While S&P does consider private debt in its scores former head, David Jacob thinks that government bond ratings are outside of their expertise because it’s about politicians and not credit risk despite the downgrade being reflective of a pervasive "nervousness" due to a lack of cohesive economic and fiscal policies by Congress to stablize their medium-term debt burden.

While this may be true, I think the ratings more or less capture a fiscal “moment in time”. Seemingly today’s debt and political situations are much different than 2011's but the rating isn't. If this were a firm, the new information would be immediately reflected in prices however, in the soverign debt markets the U.S will have to wait until S&P is convinced otherwise.