The U.S. Deserves to Have Its Credit Downgraded

by Dan Wiener | August 2, 2011 6:33 am

dollar down The U.S. Deserves to Have Its Credit Downgraded[1]I’m not normally a bettin’ man, but while the Congress keeps arguing, I’m going to put money (figuratively anyway) on the fact that there will be:

  1. a hike to the debt ceiling by Tuesday’s Aug. 2 deadline, and
  2. a credit downgrade to AA from AAA on U.S. Treasury bonds.

Whether there will be anything accomplished in tackling the budget deficit is still up for grabs.

Frankly, if the ratings agencies don’t downgrade U.S. debt, it will be just another shocking example of their inability to really understand what’s happening in the world. They have already proved, during the mortgage securities mess, that they aren’t exactly the best analysts on the planet, by a long shot. In this case, we deserve to have our debt downgraded simply because of the inability of our policymakers to get a handle on the budget deficit. How can the U.S. continue to cling to a AAA rating? It can’t right now.

In any case, would a downgrade to AA be bad for the U.S.? Well, it’s a question of losing face, for sure. But would yields surge and prices drop dramatically? Hard to say, but I’m also betting against that one since, for one thing, the bond market is incredibly efficient and pretty much knows what’s coming down the pike.

That’s why U.S. 10-years still yield less than 3%. Japanese sovereigns are only AA-rated, and they yield 1.08%, which is almost one-third our yield. Australian bonds are rated AAA, and they currently yield 4.80%, which is significantly above our yield. German bonds, from a country with the strongest economy in a very weak Eurozone, are yielding 2.54%. So, who’s to say that a AA rating would hurt bond prices and push yields higher?

In fact, a downgrade to U.S. debt might be, though I caution only “might be,” a wake-up call to Washington, D.C., that it’s really time to get the House in order, and the Senate.

It’s important to remember, as this grandstanding continues, that the debt ceiling is a borrowing limit. Without a hike, the U.S. can’t borrow any more than the $14.3 trillion limit. That doesn’t mean the government is going to run out of money on Tuesday, nor does it mean that it won’t be able to pay its bills on Tuesday. In fact, revenues (better known as taxes) are coming in higher than anticipated, and the Treasury didn’t even lay out what it intended to do in terms of prioritizing spending until after the markets closed Friday night. It also hasn’t said whether it, indeed, has enough money to pay bills through Tuesday, through a week from Tuesday or maybe even for the next few weeks. That information is still to come.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2010/11/dollar-down.jpg

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