American Pride Takes A Hit With S&P's Downgrade
For generations, the United States and its debt — sold in the form of U.S. Treasuries — have been synonymous with safety. Now, though, the nation's sterling credit is tarnished. The ratings agency Standard & Poor's has downgraded the U.S. from AAA to AA-plus, one notch down. The downgrade has raised big questions about what this will mean for investors and for the nation as a whole.
A few years ago, it was unthinkable that the United States would have its credit downgraded, but a lot of unthinkable things have happened since then — like the global financial collapse, the European debt crisis and a fight over the debt ceiling that took the nation to the brink of default.
"What matters is that someone dared to downgrade, and it's a shock to American pride," says Tyler Cowen, professor of economics at George Mason University. "It's a way of saying our government isn't working right now."
In justifying the downgrade, S&P focused on political issues, saying it wasn't sure leaders in Washington were willing to take on the difficult task of truly addressing the nation's longer-term debt issues. Cowen says this downgrade could be an opportunity.
"What you need are people looking at themselves long and hard in the mirror and saying, 'I was partly responsible for this. How can I change?' And until we do that that, I think it's just going to get worse," he says.
What's not clear is whether this "shock to American pride" will also come with a financial shock when the markets open on Monday morning.
"The initial reaction may be quite negative," says Mark Zandi, chief economist at Moody's Analytics, "but by the end of the day — certainly by the end of the week — I don't think this is going to have a major impact."
Zandi says a lot of investors saw this downgrade coming. He says it's also important to note the other two major credit ratings agencies — his parent company, Moody's, and Fitch — are sticking with their AAA ratings for the U.S. so far.
"This is an opinion of one analyst committee at a rating agency. This doesn't change anything," Zandi says.
He says the opinions of bond investors are what really matter. Even as rumors of a downgrade swirled last Friday, they were still buying lots and lots of U.S. Treasuries.
"If there's any trouble anywhere on the planet, they come to the U.S. Treasury as a safe haven," Zandi says.
The largest investors aren't making their decisions based on what S&P says. They do their own risk analysis.
The downgrade does create some complications, though. Many large institutional investors have guidelines that say their money can go only into super-safe AAA investments.
"My colleagues are reaching out with the question to investors, 'What would you like to do?'" says Mohamed El-Erian, CEO of PIMCO, the investment firm that manages money for U.S. pension funds and overseas investors. PIMCO is giving investors two options.
"One is maintain the holdings and change the guideline," El-Erian says. "Second, sell the holdings." Those answers are still coming in.
"My sense is most of them will say, 'Maintain Treasuries for now,'" El-Erian says. "Because, let's remember, there is nobody out there who can step in."
As he put it, the U.S. used to be the only clean shirt in the drawer. Now it's the cleanest of the dirty shirts — not perfect, but the best option. Still, he says, there are other ripples to consider, perhaps most significantly, the psychological effect of being a nation that's no longer AAA.
"We are at a fragile time for confidence," El-Erian says. "This loss of AAA, which was unthinkable, will erode confidence further."
That erosion could in turn slow economic growth even further — the real danger of being an AA-plus nation.
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