It seems there are a lot of guys on vacation right now because I’ve basically been on call for all the networks providing analysis and commentary (and mostly hand holding) surrounding the credit downgrade by Standard & Poor’s of the US government.
I thought I would share some of the highlights and interesting points of note in a hodge podge fashion of some of the things that have been happening. In no particular order:
1. Thursday the markets started selling off and people were trying to figure out what exactly the trigger was. Consensus was that the fear of the inability to contain the debt “contagion” (that’s a funny word that’s been adopted) in the Eurozone had finally broken the camel’s back. Analysts believed the eurozone, coupled with the debt ceiling debacle in the US spooked some investors, and the selling spooked other investors, etc.
2. Friday, the markets continued to sell off and the same ideas were being thrown around. The ECB announced a bond buying program to decrease yields for certain Eurozone member countries, and some thought that the continual measures being adopted was scaring some investors that the problem essentially hadn’t been figured out because it’s been week after week of new measures, austerity votes, calls for central banks to step in with stimulus, etc.
3. Friday after the markets closed, Standard & Poor’s downgraded US government from AAA to AA+, one notch. Earlier in the day, S&P sent a draft report to the Obama administration for their review. The administration found that S&P had erroneously added $2 trillion to the estimate for discretionary spending which was part of the reason for the downgrade. The final draft omitted this number altogether and S&P stood by their decision, mostly on the grounds of “political brinksmanship”. S&P’s credibility called into question by the administration in light of the $2 trillion error.
4. The two other major ratings agencies (Moody’s and Fitch) re-affirm AAA status recently.
5. Investors had the whole weekend to worry.
6. Middle east markets and asian markets started to drop Sunday, a prelude to US markets.
7. Shortly after the downgrade, people started to put two and two together and realized the Thurs/Fri sell off was because the downgrade had leaked. It’s possible a few people knew, made moves big enough to scare those who didn’t into selling as well. Downgrade announcement made Friday evening, lightbulbs go off everywhere (the ones above people’s heads).
8. Suggestions made that if US gov is AA+, it would be hard to assign AAA to anyone else. Credit rating is supposed to be about risk of default, but there is also the issue of capacity. If Bulgrovia was AAA but only has $25 million in treasuries out there, money isn’t going to flock there en masse. US treasury capacity is huge.
9. Warren Buffett suggests US gov should be AAAA (that’s four A’s). Ironically, his holding company Berkshire Hathaway is largest shareholder of Moody’s. I suppose if he thinks there should be a AAAA, he could probably make it happen at Moody’s lol
10. Suggestions that AA+ is the new AAA given global credit conditions in general.
11. If US gov is downgraded, then related agencies should be downgraded as well, such as Freddie and Fannie – they were subsequently downgraded Monday. They are backstopped by the US gov, so it only makes sense.
12. S&P has a separate rating for US treasuries themselves, which remains AAA – which probably explains why money market funds which need a certain amount of AAA debt (by law) didn’t all sell off holdings. Besides, where would they put it?
13. That’s probably enough for now… and the Starbucks I’m in is about to kick me out.