Tuesday, August 2, 2011

S&P under pressure over US credit rating

Standard & Poor’s is in the spotlight again.

The question facing the credit rating agency is whether it will downgrade the triple A credit rating of the US, or whether a tentative debt deal struck in Washington involving up to $2,400bn in deficit cuts over the next decade will avert such a move.

“Standard & Poor’s has been the most explicit about a downgrade,” said Eric Green, director of US rates research at TD Securities.

Moody’s Investors Service, S&P’s main rival in the rating business, has already indicated its top-notch ranking of the world’s biggest economy is safe for now. Moody’s said on Friday that its “review for downgrade will more likely than not conclude with a confirmation of the AAA rating, albeit with a shift to a negative outlook”.

But S&P has, so far, not issued any statement. It said on Monday that the review of the US triple A rating, which started on July 14, was continuing.

Investors are unsure what the agency will do.

The main reason for this uncertainty is S&P’s comment in its review that it was looking for $4,000bn of deficit cuts to prevent the level of US debt relative to gross domestic product from rising too far.

“We expect the debt trajectory to continue increasing in the medium term if a medium-term fiscal consolidation plan of $4,000bn is not agreed on,” S&P said.

The deal struck in Washington has a lower headline figure of debt reduction, however, leading some analysts to expect that a downgrade is still possible.

“The risk of a downgrade to the US triple A rating remains high,” said analysts at Barclays Capital.

But Deven Sharma, president of S&P who testified before US lawmakers last week, said the firm’s analysts were “misquoted” regarding this figure.

“Since there was a $4,000bn number put forward by a number of congressmen, as well as by the administration, our analyst was just commenting on those proposals, that would bring the threshold within the rating of what a triple A sovereign debt would require,” he said, according to reports of the hearings.

Mr Green at TD Securities believes S&P will hold off on a downgrade.

“S&P are no doubt under an immense amount of pressure to back off, if just for now,” said Mr Green. “I don’t think they will punish progress and this [debt-ceiling deal] is progress.”

Thomas Deas, chairman of the National Association of Corporate Treasurers, said the debt ceiling deal did not resolve the US’s bigger fiscal problems. “The next thing is: will the [credit rating] agencies downgrade the US government securities anyway?” he said.

If S&P’s analysts decide to downgrade the US’s debt, there is likely to be a tide of complaints from politicians – just as rating cuts of eurozone sovereign debt have resulted in an outpouring of scorn and renewed regulations from politicians in Europe.

Some investors, however, have welcomed the more aggressive stance from the agencies.

The agencies were widely criticised after failing to spot the risks in thousands of billions of dollars of securities backed by US mortgages in the run-up to the financial crisis, because many of these triple A-rated debts proved worthless.

However, finding alternatives to the big rating agencies would be no easy matter.

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