BREAKINGVIEWS-Timing of S&P U.S. downgrade couldn't be better

06 Aug 2011 13:25 ET

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Agnes T. Crane

NEW YORK, Aug 6 (Reuters Breakingviews) - The Standard & Poor's downgrade of the United States couldn't have come at a much better time. Markets may be wobbly, but interest rates are at historic lows and buyers of U.S. debt are plentiful as the world braces for another economic slowdown. There may be some initial turbulence when investors return on Monday, but if the rating agency waited until markets acted first the consequences would be far more severe.

After all, the rating agency's decision shouldn't have come as a shock. S&P made no secret of what it expected from the debt ceiling brawl that put the full faith and credit of the largest debtor nation in the world on the line. It wanted roughly $4 trillion in deficit reduction and a credible plan to fix longer-term deficit problems. It got neither.

Yet despite expectations of a downgrade, during last week's financial market rout investors plowed into U.S. Treasuries. Ten-year yields fell as low as 2.34 percent. With few alternatives at their disposal, it will take more than the downgrade by one closely-watched rating firm to change America's go-to status for investors in times of trouble.

Anyway, the fact that Fitch Ratings and Moody's Investors Service affirmed their AAA ratings also should keep a lid on any forced selling in credit markets as investors with mandates to hold only top-rated debt can lean on the opinions of the other two raters.

Moreover, it's hard to see an alternative to S&P's verdict having much of a salutary effect on markets. For starters, affirming its AAA rating, after it had aggressively drawn its line in the sand, would have destroyed S&P credibility with investors -- far more than the $2 trillion error it initially made in its assumptions.

Even worse, it would have sent a signal to Washington that its political shenanigans come without consequences. It's better for S&P to call out the failings of America's leaders before global investors do. The euro zone's woes serve as a cautionary tale of how swiftly investors lose confidence -- and how difficult it is to regain.

S&P's unprecedented downgrade serves U.S. lawmakers notice that their inability to govern and their willingness to hold creditors hostage has consequences. If losing the AAA crown is what it takes to knock heads together, that's far preferable to waiting for markets to unleash their wrath.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Get Breakingviews alerts directly to your inbox three times a day. To sign up click here: http://online.thomsonreuters.com/3000XtraBVRegistration

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

CONTEXT NEWS

-- The United States lost its top-tier AAA credit rating from Standard & Poor's on Aug. 5 in an unprecedented blow to the world's largest economy in the wake of a political battle that took the country to the brink of default.

-- S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government's budget deficit and rising debt burden. The action is likely to eventually raise borrowing costs for the American government, companies and consumers.

-- "The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement.

-- The outlook on the new U.S. credit rating is "negative," S&P said, indicating another downgrade was possible in the next 12 to 18 months.

-- Standard & Poor's press release: http://link.reuters.com/few92s

-- Reuters story: United States loses prized AAA credit rating from S&P <ReutersLink ID='ID:nN1E774236' />

RELATED COLUMN

Not rated <ReutersLink ID='ID:nN1E77503O' />

-- For previous columns by the author, Reuters customers can click on <ReutersLink ID='CRANE/' />

(Editing by Rob Cox and Martin Langfield)