Monday, April 18, 2011

Rating Agencies and Treasury Debt

Today, there was a bit of silliness concerning the rating of U.S. government debt. S&P said it affirmed the AAA rating of U.S. government debt, but also said that there was a one in three chance that it would lower that rating on U.S. long-term debt within two years. The Treasury countered with a press release put out under the name of Assistant Secretary for Financial Markets Mary Miller with the caption: "Treasury Welcomes S&P Affirmation of AAA Rating, Moody's View of Recent Fiscal Announcements by Both Parties as a Positive 'Turning Point' for US; Stresses Need for Action on Debt and Deficits."

In the first place, the debt of a sovereign issuer in its own currency cannot be evaluated in the same manner as corporate debt or the debt of a country borrowing in a foreign currency. Secondly, the Treasury press release is inconsequential spin. As I mentioned in a recent post, it is hard to see how there will be long-term fiscal reform in the near term, though Treasury says it is optimistic about it.

One wonders why the rating agencies waste their time trying to rate U.S. Treasury debt. They should put their effort into restoring their credibility from the disaster of their profit-motivated AAA ratings of CDOs. While S&P is right to be skeptical of the ability of the Congress and the Administration to agree on long-term fiscal changes, I do not think S&P has any particular expertise that would justify its implying that they may arrive at a rating downgrade for the U.S. government that could be read as suggesting that the Treasury is more likely to default than some AAA corporate issuers.

The stock market apparently fell in reaction to the S&P announcement, but I don't think this one-day move means much.

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