After markets closed on Friday the US Federal Government received an embarrassing 'first time' margin call in the form of an unceremonious S&P downgrade of it's privileged 'AAA' rating to the sobering 'AA+' status on all of it's bond offerings. S&P has kept the outlook 'negative' with a potential downgrade to 'AA' over the next few months.
China and minor rating agency Eagan-Jones had previously reduced the US credit rating last month. Both Fitch and Moody's have yet to move and are waiting anxiously in the wings.
S&P sighted political gridlock, growing fiscal deficits, monetary budget issues, tax/revenue issues, internal growth concerns, and slowing macro world growth as the main culprits for the downgrade. S&P has now decided that with US debt to GDP now pushing 100+% and 40% of all fiscal borrowing financing expenditures has become unsustainable and untenable.
The S&P which dragged their feet through the 2007 sub-prime debacle has waited for the 74th debt ceiling increase and almost $US15T of accumulated debt to make this ill timed move. The leaderless White House has been curiously silent on this development so far. They are probably waiting for the reaction from the investment community and trading markets on Monday morning. I doubt that it will be positive.
US Treasury's have now been knocked out of the 'non' NCAA 'Sweet Sixteen' bracket of countries which have been granted the coveted 'AAA' risk free rating. Eight countries which have lost this ultimate credit status have been able to regain the 'AAA' rating - but it has taken between 8 and 18 long years to do so. It will not be an easy task and it will take a while.
The US now has the same credit rating as Belgium. 'AAA' France is now in the sights of the S&P Grim Reaper with it's massive chartered bank exposure to sovereign EU debt uncertainty. Carrying costs for the US Treasury are expected to increase between $US75-100B per year as a result from this fall from grace. Additional cost cutting or increased borrowing will now be necessary to cover this anticipated shortfall. Only 4 corporations in the US and 15 countries (of the 126 which S&P follows) are left with the pristine 'AAA' rating.
There are many severe consequences from this downgrade. They range from higher costs of borrowing in all sectors of the economy to debilitating currency volatility to the potential tragic loss of the US world's reserve currency status. As the reserve currency it has/had (?) the unique luxury to print and finance debt in it's own currency. This downgrade is essentially a forced downgrade of the US Dollar. 'Triggered' covenant selling of the now risk free 'non' investment grade bonds by mutual and pension funds will be an immediate and pressing concern. Critical currency, trade issues, and upcoming bond auctions will soon take center stage.
The bond and currency markets are many times larger than the equity markets. The confidence and flow of funds between these markets are critical to the investment community. The majority of all world wide debt is US related and short term wholesale liquidation of Treasury's is unlikely if not impossible.
The Israeli market opened down 6% on Sunday trade before being temporarily halted. It finally closed down 7%. Asian and European markets look to open between 3 and 5% lower Monday morning. Gold briefly touched $US1,700/oz (up $US50/oz) on this dramatic development. This is a very serious and difficult issue with many long term implications - none of which are positive.
The S&P ratings drop is an unprecedented reversal of fortune for the world's largest economy. I suspend any thoughts of trading range opinions or investment conditions until which time equity markets adequately digest this significant financial landmark development.
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