StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

About The S&P Upgrade: Yawn

11 Jun 2013
Posted by Stan Collender

S&P must feel as if it just can't do anything right when it comes to rating the U.S. debt.

Financial markets and investors largely ignored Standard & Poor's when it downgraded U.S. debt in August 2011 in the wake of Congress and the White House narrowly averting a debt ceiling crisis by enacting the Budget Control Act. In fact, in spite of S&P's new assessment that they weren't as good an investment, interest rates went down rather than up as Wall Street did what it typically does in the face of increased uncertainty: It bought more Treasuries.

And with interest rates falling and their constituents' personal finances unaffected, members of Congress ignored the downgrade.

In other words, the S&P action had virtually no impact. The only thing that took a hit was S&P's own corporate reputation.

That reputational hit was fully evident yesterday when S&P reversed course and upgraded the U.S. debt rating...and received even more scorn for doing so than it did back in 2011. The negative reaction (I especially liked this story by Neil Irwin in Wonk Blog at The Washington Post and this one by Adam Sorenson of Time) wasn't because the upgrade wasn't justified; it mostly was that S&P shouldn't even be in the business of rating U.S. because -- up or down -- what it says is meaningless.

In other words, other than taking a rhetorical flourish away from those on Capital Hill and elsewhere who want to keep talking about a federal budget crisis that never seems to arrive, the S&P upgrade will have the same impact on the debate as was the case with the downgrade -- none.

S&P also warned that if the

S&P also warned that if the US doesn't address its long-run fiscal problems, then S&P will require either a short-term fiscal squeeze or downgrade the US rating.

So, S&P has just seen, along with the rest of us, a substantial and largely unanticipated improvement in the long-term US fiscal outlook. S&P has seen, along with the rest of US, that short-term fiscal stringency can have bad consequences for sovereign debt profiles. How does S&P respond to this new (sic) knowledge? By pretending that the long-term outlook can be reliably foreseen, that it remains dire and that budget stringency during a period of below-trend economic performance is a second-best policy option.

Who does the thinking at S&P?

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