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The S&P Downgrade: Is the Sky Falling?

Saturday, August 06, 2011, by Mark Thoma

Paul Krugman on the S&P downgrade:

OK, so Standard and Poors has gone ahead with the threatened downgrade. It’s a strange situation.

On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.

On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point — then went ahead with the downgrade.

More than that, everything I’ve heard about S&P’s demands suggests that it’s talking nonsense about the US fiscal situation. ... In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right. So this is an outrage — not because America is A-OK, but because these people are in no position to pass judgment.

Mark Thoma's comment:

S&P is not worried about ability to pay, it is worried that the US political system does not have the necessary willingness. The worry is that we must cut spending and raise taxes to get the debt under control, both will be needed, but as the recent negotiations over the debt ceiling made clear, the GOP is unwilling to allow the necessary tax increases.

S&P may also be covering itself after doing so poorly prior to the financial meltdown. If S&P leaves the outlook at AAA and problems emerge down the road, it's credibility will be even more shot than it is already and likely irreparable. Missing another big problem is essentially a death sentence. But if it downgrades the debt and nothing happens, it can claim its warnings and the downgrade were key factors in persuading people in both the public and private sectors to take steps to avoid disaster. It's Chicken Little claiming that his warnings stopped the sky from falling.

The point I'm making is that because of its damaged reputation, the risks S&P faces are not symmetric, and the lack of symmetry will bias the ratings it issues toward ensuring it doesn't miss another problem. The upshot is that false positives, as I believe this is, will be much more likely.

Note: Today’s post is Mark Thoma’s comment on Paul Krugman’s blog at New York Times.


Updated news: The US Treasury fights back, blaming S&P's $2 trillion mistake.

"Independent of this error, there is no justifiable rationale for downgrading the debt of the United States. There are millions of investors around the globe that trade Treasury securities. They assess our creditworthiness every minute of every day, and their collective judgment is that the U.S. has the means and political will to make good on its obligations. The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action."

The full Treasury statement on S&P is here ...
http://www.treasury.gov/connect/blog/Pages/Just-the-Facts-SPs-2-Trillion-Mistake.aspx


Some investors' views:

    - Warren Buffet in an interview Saturday ... "I don't get it ... in Omaha, the US is still triple-A. In fact, if there were a quadruple-A rating, I'd give the US that ... their (S&P) decision doesn't tempt me to sell. We'll stay right there ... the US, to my knowledge, owes no money in currency other than the US dollar, which it can print at will. Now if you're talking about inflation, that's a different question"   

   - Peter Fisher (Blackrock) ... “the odds are very high that there would be knock-on consequences of other borrowers getting downgraded – both corporate and public, in the US and overseas ... what really ends up happening is a downward shift of the entire spectrum of fixed-income securities ... (broader downgrades) would be a signal to all types of investors to re-examine their risk appetite.”   

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Comment:

Paul is skeptical on S&P’s credibility to downgrade US based on its pre-crisis performance. And Mark made an even clearer view that “… because of its damaged reputation, the risks S&P faces are not symmetric, and the lack of symmetry will bias the ratings it issues toward ensuring it doesn't miss another problem.” According to his logic, we shall not be surprised that the other two rating agencies, Moody's and Fitch Ratings, will follow S&P soon.

On today(Aug 6)'s Financial Times (http://www.ft.com/intl/cms/s/0/7c3f7704-c012-11e0-8016-00144feabdc0.html#axzz1UHXDyp6W), El-Erian of PIMCO said that the US credit downgrading heralds a new area in which he worries about a wider systemic impact on global financial system. And he urges a bipartisanship to "put the country back on the path of high growth, job creation and financial soundness". Similarly, Lawrence Summers pointed out that "America’s current problem is much more a jobs and growth deficit than an excessive budget deficit". In addition, he claimed 33% in probability for US to go back into recession again.

I think we are facing a very similar situation that we had last year.

QE1 ended on March 31st, 2010. As the program ended, spot crude oil fell 25% in the next four weeks, and S&P 500 lost nearly 18% over the next four months. When investors were worrying about Greece sovereign debt and its contagion, Fed chairman Bernanke, on August 23, 2010, first hinted a new quantitative easing program, or QE2, which was formally implemented in November, 2010.

During the QE2, we saw very good performance in almost all assets including equities, bonds, commodities, and fx. Huge amount of money flows into emerging markets pushing the already high asset prices there even higher to the sky, and forcing central bankers to tighten the monetary policy further.  QE2 ended just one month ago, and we see the collapse in all assets again in DMs. In next week’s FOMC meeting, we shall not expect the Fed to take any significant easing action, though the tone of the meeting will tilt toward easing.

As I commented in my last post, the speed of recovery in developed markets (DMs) and emerging markets (EMs) diverges significantly. Soon, EMs will face a new round of cash flows escaping from DMs as it happened last year. China, Brazil and India in particular, should put more emphasis on inflation than growth.  This is reflected in the China 7-day repo forward market where investors expect one 25 bps rate hike in 3 months and 2 such hikes in a year.

Next week, China will release its macroeconomic data of July. I expect higher growths of CPI, M2, Fixed-asset Investment, as well as larger net exports than market consensus. My feeling is that China still has a relatively loose monetary condition, which should give PBOC a comfortable room for further tightening. Given the turmoil in US and Europe, and relatively strong net exports, I think PBOC will appreciate RMB more over the next month or so to curb inflation in addition to one more rate hike.

China is relatively more comfortable in financial but how about the inflation？Compare to in growing price our income lvl still could not catch the developed country. Financial is not everything, it could not subsititute the industry. Only in industry then the money could be used to inprove our comsume lvl and helping in solving the unemployment.
Notes：

unsound ： 不健全的，不健康的

subprime-backed securities ：次级贷款支持证券

concede ： 让步，退让

Making stuff up ： 编造的

Mortgage debacle ： 抵押危机

A-OK ： 一切正常

GOP ： 大佬党（意指共和党）

Meltdown ： 灾难，垮台

Irreparable ： 不能弥补的，不可挽回的

Symmetric ：对称的，匀称的

Symmetry ： 对称，匀称

Bias ： 使倾斜

Upshot ： 结果

Skeptical ： 怀疑的

PIMCO ： 太平洋投资管理公司

Herald ： 通报，预示……的来临

Bipartisanship ： 两党合作

Spot crude oil ：原油现货

Contagion ： 传染病

Hint ：暗示，示意

FX ： 外汇

Collapse ： 倒塌，失败，衰竭

FOMC ： 美国联邦公开市场委员会

Tilt ： 使倾斜，使翘起

Repo ： 回购协议（repurchase agreement）

BPS ： 每股净资产

PBOC ： 中国人民银行

Turmoil ： 混乱，骚动

Curb ： 控制，勒住

The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

那些曾经为次贷证券评级的人现在却宣称他们是财政政策的仲裁者？这可能吗？

In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right. So this is an outrage — not because America is A-OK, but because these people are in no position to pass judgment.

简单说来，标普就是在编造故事，并且，在抵押危机之后，他们真的没有那个权利（意指评级权力）。所以，这是一个侮辱，不是因为美国现在一切正常，而是因为标普根本就没有地位来评级。

S&P may also be covering itself after doing so poorly prior to the financial meltdown.If S&P leaves the outlook at AAA and problems emerge down the road, it's credibility will be even more shot than it is already and likely irreparable. Missing another big problem is essentially a death sentence. But if it downgrades the debt and nothing happens, it can claim its warnings and the downgrade were key factors in persuading people in both the public and private sectors to take steps to avoid disaster.

由于金融危机之前标普糟糕的表现，它现在可能也在恢复当中。如果标普放任美债在AAA的负面观察，那问题就会在一段时间之后浮现出来，它的可信性相对于它曾经的样子可能会更糟糕，并且难以挽回。忽略另外一个大问题就是本质上的死刑宣判。但如果它对美债的等级下调并且没事发生，它就可以宣称它的警告和下调评级正是劝说包括公共和私人部门有序防止危机的关键因素。

The point I'm making is that because of its damaged reputation, the risks S&P faces are not symmetric, and the lack of symmetry will bias the ratings it issues toward ensuring it doesn't miss another problem.

我所做出的观点是，由于标普糟糕的声誉，标普所面对的风险是不对称，而这种不对称将会倾斜于确保它不会忽略另外一个问题。

Paul Krugman on the S&P downgrade, in his view, S&P &P is just making stuff up ，They don’t have that right.So this is an outrage — not because America is A-OK, but because these people are in no position to pass judgment.
在克鲁德曼看来，不是因为美国非常好，而是因为标普没有资格去评定。如果这样的评级机构都不能对美国主权信用评级做出合理的判断，谁还能拥有资格呢，当标普对其他国家，尤其是在欧债危机期间，持续下调欧元区国家的主权信用评级时，谁质疑它的权威了吗

I am looking forward to the data released on Tuesday, maybe a higher CPI will appear! I hope a not so loose monetary policy can be implemented!

the loss of America's AAA rating could lead to some market tumult and will further weaken the dollar, causing foreign currency-denominated costs to rise for U.S. companies and likely undermining any economic recovery. Investors seem to be losing hope. The movements of markets are collective predictions of future prosperity, and the tidings are increasingly grim.

Raghuram G. Rajan, professor of economics at the University of Chicago said that downgrade of debt in a smaller emerging economy would most likely immediately bring jumps in interest rates that would affect companies, home buyers and car purchases. But the strength of Treasuries, which tend to determine mortgage rates, would keep rates low for now

标准普尔的动作通常和穆迪的一致，我觉得说标普没有资格评级是扯淡。当时次贷为什么损失大，是因为CDS的评级在于SPV或者保险公司的评级，而CDS的主要评级者是FITCH，加上有抵押没抵押的recovery rate都在45%的假设上，你现在去看bloomberg，他们的假设还在40%，事实证明，recovery rate完全达不到这么高，而且违约率在行业间的相关性也比预想的高得多，这就导致了模型上的失误。我个人的评级模型和SP的几个ratio同步率在90%以上，结果和他们也差不多，所以说标普的评级资格是毋庸置疑的。反而倒是穆迪的KMV纯扯淡，大家把被评级公司的股票价格反过来看就是违约率的走势了

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S&P将美国评级降低没必要引起那么多的指责吧，想想给欧洲国家降低评级的时候。双重标准是要不得的。S&P也许早就该将美国的评级降低了。在金融风暴的时候美国将次贷危机的风险转嫁到全球，导致拖累全球经济。当时不敢降级是因为那个时候美国全国上下都在努力搞经济复苏，不敢成为全民公敌。现在美国的政客们自己都不把美国的国家利益当做一回事，让一个公司来承担背负这种责任，实在是太好笑了。

标普的评级调整顺序已经到美国了，这样看来似乎这次评级下调在短期内应该不会在涉及到其他的国家。最起码也要等到这次评级的效果全部或者部分显现出来之后再有动作。美股在周五的低开一段时间之后又反弹似乎说明一些问题。最起码是公众没有像08年那样恐慌。

骆驼祥子 发表于 2011-8-7 10:00
Paul Krugman on the S&P downgrade, in his view, S&P &P is just making stuff up ，They don’t have th ...

Yes. Quite a few European politicians and economists criticized the manner and timing of certain sovereign debt rating decisions during the current euro zone crisis, although the agencies have fiercely defended their behavior.