S&P Downgrade and Loomin’ Market Uncertainty
On Friday Standard & Poor’s, one of the three leading rating agencies, downgraded the US government’s credit rating Friday, marking the first time in history since the rating was given in 1917. The rating agency cited the recent plan worked out to raise the debt ceiling, claiming that it “falls short” of what’s needed. The two other leading ratings agencies left their rating of US debt at AAA.
S&P also cited the discord in the two-party system as a hurdle to reducing the nation’s soaring debt. To be sure, the ratings agencies lost a great deal of credibility during the credit crisis of 2008 by failing to foresee it, when so many others did.
“The political brinkmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective and less predictable than what we previously believed,” said S&P.
“The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.”
From now on, the US will carry an S&P debt rating of AA-plus, as opposed to the much-desired AAA, thus joining countries such as Japan, China, Spain, Taiwan and Slovenia.
The downgrade may increase US borrowing costs, since its bonds may be considered riskier. The real decisions, however, will come as markets open back up Sunday evening. Higher interest rates charged by the US Treasury could lead to higher rates in other areas, such as mortgages and student loans.
Come Monday, despite the S&P decision, Treasury Bonds might still be considered a safehaven, especially in dire economic conditions. Moreover, both Moody’s Investors Service and Fitch Ratings, the other two main credit rating agencies, have kept the US’s AAA rating “for now.”
To be sure, those firms did warn that a downgrade could come if the US did not do more to reduce its debt, which sits now well-above $14 trillion.
The timing of the S&P downgrade, which came late Friday night after a long week of market turmoil, whilst markets were closed, “seems like a sucker punch,” said Mark Vitner, a senior economist at Wells Fargo.
“Why would you do this now?” he asked.
Indeed, it seems the timing of the announcement, and not the announcement itself, is the most mysterious part of the whole equation. The timing enabled central planners at the G20 to prepare comments and actions for Sunday. The ECB, too, held an emergency meeting over the weekend, inspired not only by the S&P downgrade, but Germany’s announcement that it will not bailout Italy or any further nations. Moreover, it is unlikely there is in peripheral Eurozone countries the will to take on such loans and the economic dependence on core nations derived therefrom.
“The action by S&P reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures like closing taxpayer-funded giveaways to billionaires, oil companies and corporate jet owners,” Harry Reid (D-Nev.) said.
Competent chartist Dan Norcini said, in an interview with King World News, “The downgrade underscores just how severely the US financial balance sheet has degraded as the total federal debt is now at 100% of GDP and looks to be rising in the immediate years ahead. History teaches us that nations which reach a Debt to GDP ratio of 90% soon begin a process of economic deterioration. The US is will not be an exception.”
Should the “safest investment on the planet” (US Treasury debt)… not be as sure a bet at current yields as it once was, where do nervous investors park their money? This should continue to provide a good floor of buying support beneath the metal of kings.”
Back in April, when S&P downgraded its outlook on US government debt to negative, fresh safe-haven buying interest was prompted, and both gold and silver futures rallied sharply. Back then, the gold price closed in on the major psychological resistance point of $1,500 for each troy ounce, and set what was then another record high. Today, what many view as the next major psychological resistance level, $1,750USD per troy ounce, seems certainly plausible, as former intelligence officer Bob Chapman has stated. Bob says gold could hit $1,750 an ounce by the end of August. This, to be sure, was said before the downgrade.
Certainly, the beginning of this week could hold some major changes in global financial markets, as sovereign investors and central planners move wealth to those economic spaces they feel will bring the largest yields or are safe. Taking pressure off the Dollar is Germany’s recent announcement they will not bailout Italy, and the increasingly clear picture that, to save the Eurozone, not hundreds of billions, but trillions of Dollars will be needed. In the end, I anticipate mindboggling amounts of money to be thrown at the Cause of European Unity. In the US, QE3 is sure to sometime soon to be officially announced.